IRS Expands FAQs on CARES Act Employee Retention Credit

May 12, 2020Alerts

An employer may qualify for the Employee Retention Credit under either of the following two circumstances:

  • The employer’s business must be fully or partially suspended by governmental order due to COVID-19 during the calendar quarter; or
  • The employer’s gross receipts must be below 50 percent of the comparable quarter in 2019.

Amount of the Credit
The Employee Retention Credit is a fully refundable tax credit equal to 50 percent of “qualified wages,” including allocable qualified health care expenses, that eligible employers pay their employees after March 12, 2020 and before January 1, 2021. The maximum credit is $5,000 per employee and is allowed against the employer’s share of social security taxes.

The FAQs address 94 points relating, among other things, to (1) determining which entities are considered a single employer using the aggregation rules, (2) determining when an employer’s trade or business operations are considered to be fully or partially suspended due to a governmental order, (3) determining when an employer is considered to have a significant decline in gross receipts, (4) determining qualified wages, (5) amount of allocable qualified health plan expenses, (6) special issues for employees, and (7) special issues for employers.

View the full text of the FAQs.

The following summarizes key points from the FAQs.

Determining Qualified Wages
If an eligible employer averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for time that the employee is not providing services due to either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts. For these employers, qualified wages taken into account for an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship described in (1) or (2) above.

If the eligible employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described in (1) or (2) above.

Qualified wages are calculated without regard to federal taxes imposed or withheld, including the employee’s or employer’s shares of social security taxes, the employee’s and employer’s share of Medicare tax, and federal income taxes required to be withheld.

Determining Average Number of 2019 Full-Time Employees
The term “full-time employee” means an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month (130 hours of service in a month is treated as the monthly equivalent of at least 30 hours of service per week). An employer that operated its business for the entire 2019 calendar year determines the number of its full-time employees by taking the sum of the number of full-time employees in each calendar month in 2019 and dividing that number by 12.

Determining Qualified Health Plan Expenses (as updated by the IRS on May 7, 2020)
Qualified wages include an allocable portion of the “qualified health plan expenses” paid or incurred by an Eligible Employer and consist of amounts paid or incurred to provide and maintain a group health plan, but only to the extent that those amounts are excluded from the gross income of employees.

An eligible employer that averaged 100 or fewer full-time employees in 2019 may treat health plan expenses allocable to the applicable periods as qualified wages even if the employees are not working and the eligible employer does not pay the employees any wages for the time they are not working.

An eligible employer that averaged more than 100 full-time employees in 2019 may claim the Employee Retention Credit for the qualified health plan expenses paid or incurred for employees that were laid off or furloughed without pay. Health plan expenses allocated to employees for time periods when they are providing services cannot be included for the Employee Retention Credit.  Employers that reduce their employees’ hours can claim the Employee Retention Credit for the qualified health plan expenses allocated to the hours not worked. For example, if an employer reduces its employees’ hours and pay by 40% but continues to provide full health coverage, 40% of the health plan expenses can be considered for the Employee Retention Credit.

An Eligible Employer who sponsors a fully-insured group health plan may use any reasonable method to determine and allocate the plan expenses, including one average premium rate for all employees.

Example: Employer A Sponsors an insured group health plan that covers 400 employees, some with self-only coverage and some with family coverage. Each employee is expected to have 260 work days a year. (Five days a week for 52 weeks.). The employees contribute a portion of their premium by pre-tax salary reduction, with different amounts for self-only and family. The total annual premium for the 400 employees is $5.2 million. (This includes both the amount paid by the Eligible Employer and the amounts paid by employees through salary reduction).

For an eligible employer using one average premium rate for all employees, the average annual premium rate is $5.2 million divided by 400, or $13,000. For each employee expected to have 260 work days a year, this results in a daily average premium rate equal to $13,000 divided by 260, or $50. That $50 is the amount of qualified health plan expenses allocated to each day of qualified wages per employee.

Interaction of the Employee Retention Credit with Other Tax Credits
An eligible employer may receive both the tax credit for qualified leave wages under the FFCRA and the Employee Retention Credit under the CARES Act, but not for the same wages. Any qualified wages taken into account for purposes of the Employee Retention Credit cannot be taken into account for the employer credit for paid family and medical leave. Further, an employee included for purposes of the Work Opportunity Tax Credit may not be included for purposes of the Employee Retention Credit.

Aggregation Rules for Related Employers
All entities that are members of a controlled group of corporations or a group of entities under common control, or members of an affiliated service group, or otherwise aggregated for employee benefit purposes are considered a single employer for purposes of the Employee Retention Credit rules and for making the following determinations:

  • Whether the employer has a trade or business operation that was fully or partially suspended due to orders related to COVID-19 from an appropriate governmental authority.
  • Determining whether the employer has a significant decline in gross receipts.
  • Determining whether the employer has more than 100 full-time employees.
  • The application of the rules that preclude an employer from claiming the Employee Retention Credit if any member of the aggregated group received a PPP loan.

Partial Suspension of Employer’s Business Operations
An employer whose trade or business operations are partially suspended during a calendar quarter due to a governmental order is an Eligible Employer that may be entitled to the Employee Retention Credit. This includes an employer whose workplace is closed by a government order for certain purposes, but the employer’s workplace may remain open for other purposes or the employer is able to continue certain operations remotely.

Example: Employer B, a retail business, is forced to close its retail storefront locations due to a government order. The retail business also maintains a website through which it continues to fulfill online orders; the retailer’s online ordering and fulfillment system is unaffected by the government order. Employer B’s business operations would be considered to have been partially suspended due to the governmental order requiring it to close retail store locations.

Employers that operate a trade or business in multiple locations and are subject to State and local governmental orders limiting operations in some, but not all, jurisdictions are considered to have a partial suspension of operations and would therefore be an Eligible Employer with respect to all of its operations in all locations.

Example: Employer C is a national retail store chain with operations in every state in the United States. In some jurisdictions, Employer C is subject to a governmental order to close its stores, but it is permitted to provide customers with curbside service to pick up items ordered online or by phone. In other jurisdictions, Employer C is not subject to any governmental order to close its stores or is considered an essential business permitting its stores to remain open. Employer C establishes a company-wide policy, in compliance with the local governmental orders and consistent with the CDC and DHS recommendations and guidance, requiring the closure of all stores and operating with curbside pick-up only, even in those jurisdictions where the business was not subject to a governmental order. As a result of the governmental orders requiring closure of Employer C’s stores in certain jurisdictions, Employer C has a partial suspension of operations of its trade or business. The partial suspension results in Employer C being an Eligible Employer nationwide.

If a trade or business is operated by multiple members of an aggregated group and if the operations of one member of the aggregated group are suspended by a governmental order, then all members of the aggregated group are considered to have their operations partially suspended, even if another member of the group is in a jurisdiction that is not subject to a governmental order.

Suspension of Business Operations of Employer’s Suppliers
An employer with an essential business may be considered to have a full or partial suspension of operations if the business’s suppliers are unable to make deliveries of critical goods or materials due to a governmental order that causes the supplier to suspend its operations.

Example: Employer D operates an auto parts manufacturing business that is considered an essential trade or business in the jurisdiction where it operates. Employer D’s supplier of raw materials is required to shut down its operations due to governmental order. Employer D is unable to procure these raw materials from an alternative supplier. As a consequence of the suspension of Employer D’s supplier, Employer D is not able to perform its operations. Under these facts and circumstances, Employer D would be considered an eligible employer because its operations have been suspended as a result of the governmental order that suspended operations of the supplier.

Continuation of Comparable Operations Through Telework
If an employer’s workplace is closed by a governmental order, but the employer is able to continue operation comparable to its operations prior to the closure by requiring its employees to telework, the employer’s operations are not considered to have been fully or partially suspended as a consequence of a governmental order.

Significant Decline in Gross Receipts
A significant decline in gross receipts is calculated by determining the calendar quarter in 2020 (if any) in which an employer’s gross receipt are less than 50% or its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter in which the employer’s 2020 quarterly gross receipts are greater than 80% of its gross receipts for the same calendar quarter in 2019, or with the first calendar quarter of 2021.

Example: Employer E’s gross receipts were $100,000, $190,000 and $230,000 if the first, second, and third calendar quarters of 2020, respectively. Its gross receipts were $210,000, $230,000, and $250,000 in the first, second, and third calendar quarters of 2019, respectively. Thus, Employer E’s 2020 first, second, and third quarter gross receipt were approximately 48%, 83%, and 92% of it 2019 first, second, and third quarter gross receipts, respectively. Accordingly, Employer E had a significant decline in gross receipts commencing on the first day of the first calendar quarter of 2020 (the calendar quarter in which gross receipt were less than 50% of the same quarter in 2019) and ending on the first day of the third calendar quarter of 2020 (the quarter following the quarter for which the gross receipts were more than 80% of the same quarter in 2019). Thus, Employer E is entitled to a retention credit with respect to the first and second calendar quarters.

To be an eligible employer on the basis of a significant decline of gross receipts, the employer must take into account the gross receipts of all member of the aggregated group. If the aggregated group does not experience a significant decline in gross receipts, then no member of the group may claim the Employee Retention Credit on that basis.

Claiming the Credit
Eligible employers will claim the credits on their federal employment tax returns (e.g., Form 941, Employer's Quarterly Federal Tax Return). Eligible employers can fund qualified wages by: (1) accessing federal employment taxes, including withheld taxes that are required to be deposited with the IRS, and (2) requesting an advance of the credit from the IRS for the amount that is not funded by accessing the federal employment tax deposits, by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Example: Employer F paid $10,000 in qualified wages (and qualified health plan expenses) and, after deferral of the employer’s share of social security tax, is otherwise required to deposit $8,000 in federal employment taxes for all its employees for wage payments made during the same quarter as the $10,000 in qualified wages. Employer F has no paid sick or family leave credit under the FFCRA. Employer F may keep up to $5,000 of the $8,000 of taxes that the Employer F was going to deposit, and it will not owe a penalty for keeping the $5,000. Employer F will later account for the $5,000 it retained when it files Form 941, Employer’s Quarterly Federal Tax Return, for the quarter.

Requirements for Waiver of Penalty for Reduced Employment Tax Deposits
An Eligible Employer will not be subject to a penalty under section 6656 of the Internal Revenue Code for failing to deposit federal employment taxes relating to qualified leave wages in a calendar quarter if:

  • the Eligible Employer paid qualified wages to its employees in the calendar quarter before the required deposit,
  • the amount of federal employment taxes that the Eligible Employer does not timely deposit, reduced by (a) any amount of the employer’s share of social security tax deferred under the CARES ACT, and (b) any amount of federal employment taxes not deposited in anticipation of the credits claimed for paid sick and/or family leave under the FFCRA, is less than or equal to the amount of the Eligible Employer’s anticipated Employee Retention Credit for the qualified wages for the calendar quarter as of the time of the required deposit, and
  • the Eligible Employer did not seek payment of an advance credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19, with respect to any portion of the anticipated credits it relied upon to reduce its deposits.