The federal government, state governments, and their agencies are not eligible employers for the Employee Retention Credit (ERC). However, tribal governments and tribal entities that carry out a trade or business may be eligible. Organizations described in section 501 (c) of the Internal Revenue Code (the “Code”) and exempt from taxes under section 501 (a) of the Code may also be eligible employers if they meet the requirements of the credit. The ERC is a fully refundable tax credit that eligible employers can request to cover certain payroll taxes.
To qualify, employers must pay employees with W-2 forms and not be recovering startups. Churches and other religious organizations affected by capacity restrictions imposed by the government or that experienced a significant decrease in their gross revenues may also be eligible. The amount of the credit could often exceed what the employee would have earned without the pandemic. Self-employed individuals are not eligible for the ERC with respect to their own self-employment income.
Domestic employers are not considered to operate a trade or business and are therefore not eligible for the ERC with respect to their domestic employees. In order to determine eligibility for the ERC, 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. 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 ERC. The ERC is an important benefit for businesses affected by COVID-19, providing them with much needed financial relief.
To be eligible, employers must meet certain criteria and apply the aggregation rules of sections 52 (a) and (b) of the Code and sections 414 (m) and (o) of the Code. Self-employed individuals are not eligible for this credit with respect to their own self-employment income, while domestic employers are not considered to operate a trade or business and are therefore not eligible for this credit with respect to their domestic employees. Tribal governments may be eligible if they otherwise meet the requirements of this credit.
