The employee retention credit under the CARES Act encourages companies to keep employees on their payroll. These FAQs are not included in the Internal Revenue Bulletin and therefore cannot be relied upon as a legal authority. This means that the information cannot be used to support a legal argument in a court case. The number of employees an employer has doesn't affect whether an eligible employer can apply for the credit.
For the purposes of the employee withholding credit, “trade or business” has the same meaning as when used in section 162 of the Internal Revenue Code (the “Code”), except for the trade or business of providing services as an employee. According to Article 162 of the Code, an activity is not considered a trade or business unless its main objective is to obtain benefits and is carried out regularly and continuously. The facts and circumstances of each case determine if an activity is a trade or a business. A taxpayer does not necessarily need to make a profit in a particular year to engage in an activity or business, as long as there is a good-faith desire for profit.
The federal government, the governments of any state or political subdivision of the same state, and any agency or agency of those governments are not eligible employers and are not entitled to receive the employee retention credit. However, tribal governments and tribal entities may be eligible employers. See Are Tribal Governments and Tribal Entities Eligible for the Employee Retention Credit? As a general rule, section 162 of the Code determines whether the activities constitute a trade or a business for the purposes of the employee retention credit. However, since tribal governments are not subject to income tax under the Code and are therefore generally not required to determine whether a tribal activity is a trade or a business under Article 162 of the Code, the Department of the Treasury and the IRS have concluded that the rules of section 162 are not the appropriate basis for determining whether a tribal government conducts a trade or business for the purposes of the employee retention credit.
Instead, solely for the purposes of the employee retention credit, a tribal government is considered to carry out commercial or commercial activities, and all activities carried out by the tribal government will be considered part of those commercial or commercial activities. In addition, for the purposes of the employee retention credit only, any entity that a tribal government reasonably considers to share the same tax situation as the tribal government (employing tribal entity) is considered to carry out commercial or commercial activities, and all activities carried out by the employing tribal entity will be considered part of those commercial or commercial activities. Any entity other than a tribal government or an employer of a tribal entity must determine whether its activities constitute the exercise of a trade or business under section 162 for purposes of determining eligibility for the employee retention credit. Self-employed individuals are not eligible for the employee retention credit with respect to their own self-employment income.
However, a self-employed person who employs people in their trade or business and who otherwise meets the requirements to be an eligible employer may be eligible to receive the employee retention credit with respect to qualified wages paid to employees. Domestic employers are not considered to operate a trade or business and are therefore not eligible for the employee retention credit with respect to their domestic employees. However, domestic employers who are also employers operating a trade or business and who generally report payroll taxes attributable to their household employees on the same Form 941, the employer's quarterly tax return, or on Form 944, the employer's annual federal tax return, which is used to declare payroll taxes attributable to employees of the trade or business, are eligible for the employee retention credit, but only with respect to employees of the trade or company and their qualified salaries from the trade or company. Employers reported the total qualifying wages and the employee retention credit related to COVID-19 on Form 941 for the quarter in which the qualifying wages were paid.
Employer U has the right to treat 80 percent of the wages paid as qualified wages and to request an employee retention credit for 80 percent of the salary paid. If the withheld payroll tax deposits were not sufficient to cover the expected credit amount, the employer could file Form 7200 (prepayment of employer credits due to COVID-19) to request prepayment of the remaining amount of credit. For purposes of determining eligibility for the employee retention credit, all employers, including tribal governments and tribal entities, must apply the aggregation rules of sections 52 (a) and (b) of the Code and sections 414 (m) and (o) of the Code. In addition, any qualifying wages that are taken into account for the purposes of the employee retention credit cannot be considered for the paid family medical leave credit under section 45S of the Internal Revenue Code (the Code).
Payments made in connection with the termination of a former employee's employment relationship are not qualifying wages because they are payments from a previous employment relationship and, therefore, cannot be attributed to the time during which the employee retention credit can be requested. For administrative staff whose hours were reduced by 40 percent but who are paid 100 percent of the normal wage, Employer T may consider 40 percent of the salary paid for the time these employees don't provide services as qualifying wages for the purposes of the employee retention credit. The amounts paid to licensed real estate agents at real estate brokerage firm Y do not constitute wages within the meaning of section 3121 (a) of the Code and, therefore, are not qualifying salaries for the purposes of the employee retention credit. An eligible employer may use any reasonable method to determine the number of hours that a salaried employee does not provide services, but for which the employee receives a wage equal to the employee's normal wage or at a reduced wage.
While Employer W believes that some of its employees may not be as productive when working remotely, employees work their normal working hours. Qualified wages are calculated without taking into account federal taxes imposed or withheld, including the employee or employer's share of social security taxes, the employee and employer's share of Medicare taxes, and federal income taxes that must be withheld. Reasonable methods include the method (or methods) that the employer uses to measure the right of exempt employees to intermittent or reduced leave under the Family and Medical Leave Act, or the method that it uses to measure the right of exempt employees to paid vacation and the use of such leave according to the employer's standard practices. The minister's salary and stewardship allowance do not constitute salaries within the meaning of section 3121 (a) of the Code and, therefore, are not qualified salaries for the purposes of the employee retention credit.