Recently Issued IRS Guidance on the CARES Act Employee Retention Credit
On April 29, 2020, the IRS issued a list of Frequently Asked Questions (“FAQs”) to provide clarification around the Employee Retention Credit (“ERC”), as provided for in the Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act). As noted in the IRS guidance, these IRS FAQs are not legally binding. Additionally, these FAQs contain guidance that differs from earlier guidance provided by the April 23, 2020 Joint Committee on Taxation (“JCT”) in document JCX-12R-20 “Description of the Tax Provisions…of the CARES Act.”
The refundable ERC provides that eligible employers may apply a credit equal to 50% of the first $10,000 in “qualifying wages” per employee (i.e. up to $5,000 per employee) against the employer portion of Social Security taxes (and potentially against other federal employment tax and income tax obligations).
Eligible Employers: Employers who experience either of the following indicators of an economic hardship:
- A partial or full suspension of operations by order of a governmental authority due to COVID-19; or
- A decline of at least 50% of gross receipts as compared to the same quarter in the prior year.
Qualifying Wages: Compensation, including the value of qualified health plan benefits, paid after March 12, 2020, and before January 1, 2021. The definition further depends on the employer’s average number of full-time employees in 2019.
- For employers with more than 100 employees in 2019, “qualified wages” are amounts paid to an employee for the time they are not providing services due to one of the indicators of economic hardship, and qualified wages in any 30 day period are limited to the amount each employee would have been paid for working an equivalent duration during the 30 days immediately before the “qualified” period.
- For employers with 100 or fewer full-time employees in 2019, “qualified wages” are wages paid to all employees during the period of economic hardship.
Beginning with the second quarter of 2020, eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, IRS Forms 941. Employers are reimbursed for the credit by reducing the amount that has been withheld from employee wages, up to the amount of the credit, from their required payroll tax deposits. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS.
Please note: employers that obtain Paycheck Protection Loans are not eligible for the employee retention tax credits.
IRS Employee Retention Credit FAQs
The IRS guidance, released on April 29, 2020, contains nearly 100 FAQs in the following categories:
- General Information
- Determining Which Employers are Eligible to Claim the ERC
- Determining Which Entities are Considered a Single Employer Under the Aggregation Rules
- Determining What Types of Governmental Orders Related to COVID-19 May be Taken into Account for Purposes of the ERC
- Determining When an Employer’s Trade or Business Operations are Considered to be Fully or Partially Suspended Due to a Governmental Order
- Determining When an Employer is Considered to have a Significant Decline in Gross Receipts
- Determining the Maximum Amount of an Eligible Employer’s ERC
- Determining Qualified Wages
- Determining the Amount of Allocable Qualified Health Plan Expenses
- How to Claim the ERC
- Interaction with Other Credit and Relief Provisions
- Special Issues for Employees: Income and Deduction
- Special Issues for Employers: Income and Deduction
- Special Issues for Employers: Use of Third Party Payers
- Other Issues
Area of Discrepancy between the IRS FAQs and the JCT “Descriptions of the Tax Provisions”
Last updated on April 23, 2020, the ERC is addressed on pages 38-43 of the JCT document JCX-12R-20. On page 42, the release states the following about whether “qualifying wages” include health care expenses paid by employers on behalf of employees if no other wages are being paid:
“This broad grant of authority permits the Secretary [of the Treasury]…to treat qualified health plan expenses as qualified wages in a situation where no other qualified wages are paid by the eligible employer or to the particular employee…”
However, this is in direct contrast to the guidance provided in IRS FAQ Questions #64 and #65 in the “Determining the Amount of Allocable Qualified Health Plan Expenses“ section:
Q64: “If an Eligible Employer that averages 100 or fewer full-time employees in 2019 pays wages to its employees during the period its trade or business operations are suspended due to a governmental order or during the quarters in which it had a significant decline in gross receipts, then the Eligible Employer may allocate its health plan expenses to the wages paid and treat the amount of allocable health care expense as qualified wages for the purposes of the Employee Retention Credit. However, if the Eligible Employer lays off or furloughs its employees and continues the employees’ health care coverage, but does not pay the employees any wages for the time they are not working, the employer may not treat any portion of the health plan expenses as qualified wages for purposes of the Employee Retention Credit because no portion of the health plan expenses would be allocable to wages paid to the employees.”
Q65: “If an Eligible Employer that averaged more than 100 full-time employees does not pay its employees any wages for time that the employees are not providing services, the employer may not treat any portion of its health plan expenses as qualified wages for purposes of the Employee Retention Credit because no portion of the health plan expenses would be allocable to wages paid to its employees.”
Additional guidance is being released on a near-daily basis and we will continue to inform you of legislative updates as they are made available.