The employee retention credit under the CARES Act encourages companies to keep employees on their payroll. This credit is available to eligible employers who have experienced a significant decline in gross receipts or who have had to suspend operations due to the COVID-19 pandemic. 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 wages paid as qualified wages and request an employee retention credit for 80 percent of salary paid.
If withheld payroll tax deposits were not sufficient to cover expected credit amount, employer could file Form 7200 (prepayment of employer credits due to COVID-19) to request prepayment of remaining amount of credit. For purposes of determining eligibility for employee retention credit, all employers including tribal governments and tribal entities must apply aggregation rules of sections 52 (a) and (b) of Code and sections 414 (m) and (o) of Code. In addition, any qualifying wages taken into account for purposes of employee retention credit cannot be considered for paid family medical leave credit under section 45S of Internal Revenue Code (the Code). Payments made in connection with termination of former employee's employment relationship are not qualifying wages because they are payments from previous employment relationship and therefore cannot be attributed time during which employee retention credit can be requested. For administrative staff whose hours were reduced by 40 percent but who are paid 100 percent normal wage, Employer T may consider 40 percent salary paid time these employees don't provide services as qualifying wages for purposes of employee retention credit. The amounts paid licensed real estate agents at real estate brokerage firm Y do not constitute wages within meaning section 3121 (a) Code and therefore are not qualifying salaries for purposes employee retention credit. An eligible employer may use any reasonable method determine number hours salaried employee does not provide services but for which employee receives...
