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IRS Issues More Guidance on the CARES Act Employee Retention Credit

The CARES Act of March 27, 2020 provides $2 trillion for incentives and support to help retain the American workforce, provide assistance for American workers, families and businesses, including tax relief and expanded unemployment insurance, support to the health care system to fight the disease, action to promote economic stabilization, and the appropriation of funds to accomplish these goals.


The Employee Retention Credit (ERC), one of the provisions of this Act, allows employers the option of taking a tax credit if they retain their workforce. Here are the fundamentals of the ERC:

Category

Provision

Eligible Employers

All sized employers retaining workers that carry on a trade or business during calendar year 2020, including tax-exempt organizations. Federal, state, and local government employers are not eligible.

Credit Eligibility

Employers whose:
  • operations were fully or partially suspended, due to a COVID-19 related shut-down order, or
  • gross receipts declined by more than 50% when compared to the same quarter in the prior year and ending with the subsequent quarter where gross receipts are more than 80% for the same calendar quarter in 2019, or with first calendar quarter of 2021
  • Partially suspended if an appropriate governmental authority imposes restrictions on the employer’s operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 such that the employer can still continue some, but not all of its typical operations
  • Basis for Credit

  • Employers with less than 100 employees: If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full time work, the employer still receives the credit.
  • Employers with more than 100 employees: If the employer had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.
  • Amount of Credit

    Credit allowed against applicable employment taxes for each calendar quarter equal to 50% of qualified wages and health plan expenses up to $10,000 for wages paid to employees 3/13/20-12/31/20. [Credits are neither reported as income nor can the wages for which a credit is earned qualify for a deduction.]

    Tax Filing

    Beginning with the second quarter of 2020, employers may file with Form 941 quarterly taxes. Advanced refunds may be requested using Form 7200 if the credit exceeds the employer’s tax liability. (Any first quarter expenses may be included on the 2nd quarter’s form.)

    IRS guidance continues to emerge around the eligibility, usage, claiming of the tax credit, and its interaction with other loans and programs. The following list describes the most current guidance on the most common employer questions as of 5/7/2020.

    BUSINESSES FULL OR PARTIAL CLOSURES

    • Governmental orders are eligible for ERC and include:
      • An order from the city's mayor stating that all non-essential businesses must close for a specified period;
      • A State's emergency proclamation that residents must shelter in place for a specified period, other than residents who are employed by an essential business and may travel to and work at the workplace location;
      • An order from a local official imposing a curfew on residents that impacts the operating hours of a trade or business for a specified period.
    • Essential businesses who cannot operate due to suspension to businesses of suppliers may be eligible for the ERC
    • NOT eligible for the ERC:
      • orders that don't restrict commerce or trade, i.e. social distancing,
      • orders unrelated to COVID-19
      • employer's voluntary closure

    AFFILIATE BUSINESSES

    • If considered a single employer entity and any one company takes the ERC, no other entities may take the ERC
    • The ERC must be allocated back, proportionately, to the members of the aggregated group

    QUALIFIED WAGES AND HEALTHCARE EXPENSES

    • Wages exempt from social security and Medicare taxes cannot be counted
    • Employers with more than 100 employees may not count amounts paid to employees for paid time off, including vacations, sick days, holidays, or other days off or include qualified health plan expenses
    • Wages paid to individuals related to the employer are not taken into account
    • Wages do not include federal taxes imposed or withheld, including social security, Medicare and federal income taxes
    • Qualified health expenses
      • include employer and employee pre-tax portions of the premium (for employers averaging more than 100 employees, they may only claim the allocable portion of the health plan expenses for the wages where the employee was not providing services)
      • includes contributions to HRAs, ICHRAs, and FSAs but not HSAs, MSAs, or QSEHRA
      • Fully insured plans = COBRA premiums, average premium rate for all employees or similar average by coverage tier, i.e. employee only vs family
      • Self-funded plans = COBRA premiums or reasonable actuarial method

    INTERACTION WITH OTHER LOANS AND PROGRAMS

    • Not eligible if taking a PPP loan at any time unless paying back the whole PPP loan by May 14, 2020 - if any one affiliated entity receives a PPP, no company that is part of the affiliation may take the ERC
    • May not receive the ERC tax credit for the same wages as claiming under the FFCRA tax credit and may not receive for the same employee as the Work Opportunity Tax Credit (WOTC)

    Per the IRS:This FAQ is not included in the Internal Revenue Bulletin, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case.

    For additional insights and workplace resources employers can leverage the wake of the COVID-19 pandemic, visit the OneDigital Coronavirus Advisory Hub, or reach out to your local OneDigital advisory team.

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