The IRS has published additional guidance in advance of tax filing season for employers utilizing the Employee Retention Tax Credit ("ERTC") as it applies to qualified wages paid after March 12, 2020, and before January 1, 2021. Section 2301 of the CARES Act allows a credit (employee retention credit or credit) against applicable employment taxes for eligible employers, including tax-exempt organizations that pay qualified wages including certain health plan expenses, to some 2 or all employees after March 12, 2020, and before January 1, 2021. The notice includes information pertaining to amendments to section 2301 of the CARES Act made by section 206 of the Relief Act. Additionally, the IRS has answered many frequently asked questions within the notice, which can be found here.

Claiming the Employee Retention Credit and Accessing Funds in Anticipation of the Credit

  • An employer that is an eligible employer as defined in section 2301(c)(2) of the CARES Act and that, after March 12, 2020, and before January 1, 2021, pays qualified wages, as defined in section 2301(c)(3) of the CARES Act, is entitled to claim the employee retention credit against the taxes imposed on employers by section 3111(a) of the Internal Revenue Code.
    • If the amount of the credit exceeds the applicable employment taxes for any calendar quarter, then the excess is treated as an overpayment and refunded to the employer under sections 6402(a) or section 6413(b) of the Code.
    • Eligible employers report their total qualified wages for purposes of the employee retention credit and claim the employee retention credit (including any refund in excess of the employer portion of social security tax) on their federal employment tax returns.
  • Notice 2020-22, 2020-17 I.R.B. 664, provides eligible employers relief from the failure to deposit penalty imposed by section 6656 of the Code for an employer’s failure to timely deposit employment taxes to the extent the amounts not deposited are equal to or less than the amount of refundable tax credits to which the eligible employer is entitled under the FFCRA and the CARES Act.
    • An eligible employer will not be subject to a penalty under section 6656 for failing to deposit employment taxes in a calendar quarter if (1) the eligible employer paid qualified wages to its employees in the calendar quarter prior to the time of the required deposit, (2) the amount of employment taxes that the employer does not timely deposit, reduced by the amount of employment taxes not deposited in anticipation of the credits claimed under sections 7001 and 7003 of the FFCRA, is less than or equal to the amount of the employer’s anticipated employee retention credit for the calendar quarter as of the time of the required deposit, and (3) the 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 the anticipated credits it relied upon to reduce its deposits.

Definition of “Eligible Employer” and “Qualified Wages”

  • The employee retention credit is available only to employers that are eligible employers.
    • “Eligible employer” is any employer carrying on a trade or business during calendar year 2020, and, with respect to any calendar quarter, for which (1) the operation of the trade or business carried on during calendar year 2020 is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19, or (2) such calendar quarter is within the period in which the employer had a significant decline in gross receipts, as described in section 2301(c)(2)(B) of the CARES Act.
    • The period during which an employer experiences a significant decline in gross receipts begins with the first calendar quarter beginning after December 31, 2019, for which gross receipts (within the meaning of section 448(c) of the Code) for the calendar quarter are less than 50 percent of gross receipts for the same calendar quarter in the prior year.
    • Tax-exempt organizations should refer to the definition of gross receipts under section 6033 of the Code to determine whether they experienced a significant decline in gross receipts under section 2301 of the CARES Act.
    • Prior to the Relief Act amendments, section 2301(j) of the CARES Act provided that an eligible employer that received a covered loan under paragraph (36) of section 7(a) of the Small Business Act (15 U.S.C. 636(a)).
    • This does not apply to any form of government.
  • Section 2301(a) of the CARES Act provides that the credit amount is equal to 50 percent of qualified wages with respect to each employee for each applicable calendar quarter in 2020.
    • “Wages” include amounts paid by an eligible employer to provide and maintain a group health plan.
  • Section 2301(c)(3)(A) of the CARES Act provides different definitions of “qualified wages” depending on the size of the employer, which is measured by the average number of full-time employees (within the meaning of section 4980H of the Code) employed by the eligible employer during 2019.
    • If an eligible employer averaged more than 100 employees during 2019 qualified wages are those wages paid by the eligible employer with respect to which an employee is not providing services due to circumstances described in section 2301(c)(2)(A)(ii)(I) of the CARES Act (relating to a full or partial suspension of the operation of a trade or business due to a governmental order) or section 2301(c)(2)(A)(ii)(II) of the CARES Act (relating to a significant decline in gross receipts.

Election Not to Take Certain Wages into Account and Coordination with PPP Loan

  • Section 2301(g)(1) of the CARES Act provides that section 2301 of the CARES Act does not apply to qualified wages paid by an eligible employer to the extent the employer elects not to take them into account for purposes of section 2301 of the CARES Act.
    • The Secretary, in consultation with the Administrator of the Small Business Administration, will issue guidance providing that payroll costs paid during the covered period for a PPP loan will not fail to be treated as qualified wages under section 2301 of the CARES Act, if an employer makes an election under section 2301(g)(1) of the CARES Act, to the extent that the PPP loan of the eligible employer is not forgiven by reason of a decision under section 7A(g) of the Small Business Act.
  • The Relief Act provides a special rule for employers that filed an employment tax return before December 27, 2020.

Aggregation Rules and Other Rules Related to the Employee Retention Credit

  • Section 2301(d) of the CARES Act provides that all persons treated as a single employer under section 52(a) or (b) of the Code, or section 414(m) or (o) of the Code, will be treated as a single employer for purposes of the employee retention credit.
    • It does not provide separate guidance on the substantive requirements of those aggregation rules or otherwise interpret those rules.
  • Section 2301(e) of the CARES Act provides that rules similar to section 280C(a) of the Code apply for purposes of the employee retention credit.
    • Generally disallows a deduction for the portion of wages or salaries paid or incurred equal to the sum of certain credits determined for the taxable year.

Regulations and Guidance

  • Requires secretary to issue forms, instructions, regulation and guidance to allow for the advance payment of the credit, provide for reconciliation of the advance payment at the time of the filing the employment tax return, and to apply the credit to third-party payers.
  • Secretary also has authority to issue guidance on the application of the definition of a “significant decline in gross receipts.”

Deferral under Section 2302 of the CARES Act

  • Employers may defer the deposit and payment of the employer’s share of social security tax and the portion of Tier 1 tax that is equivalent to the employer’s share of social security tax for the from the time period March 27, 2020, through December 31, 2020. This deferral may affect the amount that an employer may request as an advance to the credit.

Deferral under Notice 2020-65 as Modified by Notice 2021-11

  • Permits employers to postpone the withholding and payment of employee’s share of social security tax or the employees share of Tier 1 tax that is equivalent to the employee’s share of social security tax with respect to applicable wages paid to an employee on pay date during the time period of September 1, 2020 through December 31, 2020.
  • Deferral during the third or fourth quarter of 2020 does not impact an employer’s eligibility to claim the employee retention credit. However, the deferral may affect the amount that an employer may request as an advance of the credit.

The full notice and frequently asked questions are published in their entirety by the IRS here. Given the intricacies involved in the IRS guidance, employers taking advantage of the Employer Retention Credit should have involved discussions with their accounting and legal teams. Please reach out the Gordon & Rees team with any questions.

A special thank you to Abigail Martone for her significant contributions to this article.