IRS significantly expands employee retention credit FAQ

This alert has been revised to reflect updated guidance provided by the Small Business Administration and the IRS.

On April 29, 2020, the IRS provided guidance on the employee retention credit (ERC), by significantly expanding upon a list of “frequently asked questions” (FAQ) posted on its website. The FAQ now includes 94 questions covering an array of topics, including the determination of eligible employers and qualified wages, and how the credit interacts with other relief provisions provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and Families First Coronavirus Response Act (FFCRA).

This alert focuses on certain key areas where the IRS provided new or updated guidance.

Background

The ERC is a fully refundable payroll tax credit made available by the CARES Act to employers, including not-for-profits, that had their operations fully or partially suspended as a result of a government order limiting commerce, travel or group meetings (the “suspension test”). The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis (the “gross receipts test”).

The ERC is equal to 50% of qualified wages, not to exceed $10,000 per employee, paid by the employer from March 13, 2020, through the end of the calendar year. Qualified wages paid by an employer with 100 or fewer employees generally include all wages paid during the economic hardships described above; for employers with more than 100 employees, qualified wages are limited to wages paid to employees while they are not performing services. Qualified wages can also include qualified health plan expenses paid by the employer.

Key takeaways from the IRS FAQ

Determining eligibility under the suspension test

• Essential employers that have not been ordered to fully or partially shut down generally are not considered to have a suspension of operations. An employer that operates an essential business most likely will not qualify under the suspension test if the governmental order allows the employer to remain open, even though nonessential businesses being shut down by the order may have an effect on the employer’s operations. Exceptions are available for employers whose: