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COVID-19 Economic Relief and the Employee Retention Credit

December 23, 2020

December 23, 2020

*On Sunday, December 27, President Trump signed the Consolidated Appropriations Act, 2021 (the Act). The Act contains numerous individual, business, payroll, and disaster-related tax provisions that relate to the COVID-19 pandemic. The Act extended and made several changes to the employee retention credit, which we discussed below. the Act’s extension of and changes to the employee retention credit take effect from January 1, 2021.

In response to the economic downturn at the beginning of the coronavirus pandemic, Congress passed an employee retention credit under Section 2301 of the CARES Act. The employee retention credit is a refundable employment tax credit for qualified wages paid from March 13, 2020, through December 31, 2020, by eligible employers.

The credit amount is 50% of qualified wages, taking into account up to $10,000 of qualified wages, yielding a maximum credit of $5,000 per employee. The wages eligible for the credit depend on an employer’s average number of full-time employees in 2019. Under the credit as originally enacted, an eligible employer with more than 100 full-time employees could only take into account the wages paid to employees who were not providing services during the period the employer is eligible for the credit. But, for eligible employers with 100 or fewer full-time employees, all wages paid during the period an employer is eligible for the credit are taken into account. The definition of eligible wages depends, in part, on the average number of full-time employees employed by an eligible employer during 2019.

IRS guidance provides that a full-time employee means an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month, as determined in accordance with Section 4980H. See IRS, COVID-19-Related Employee Retention Credits: Determining Qualified Wages FAQ number 49. The guidance does not specifically address whether employers must include full-time equivalents for determining whether the employers averaged more than 100 full-time employees in 2019.

Several commentators have reported that the IRS guidance differs from the interpretation of the Joint Committee on Taxation. In its report on the CARES Act’s tax provisions, the Joint Committee on Taxation said that full-time employees must include full-time equivalents. See Description of the Tax Provisions of Public Law 116-136, JCX-12E-20 (April 23, 2020), n. 145. The Joint Committee based its interpretation on the language of the CARES Act, which refers to the “average number of full-time employees (within the meaning of section 4980H of the Internal Revenue Code of 1986).” Section 4980H specifically includes full-time equivalents in its definition of full-time employees for purposes of determining whether an employer is a large employer. 26 U.S.C. § 4980H(c)(2)(E).

Importantly, the IRS guidance was not published in the Internal Revenue Bulletin, and the guidance specifically states that it may not be relied upon as legal authority and cannot be used to support a legal argument in a court case. The IRS guidance may not be binding, but it is persuasive and is a good indication of how the IRS will treat taxpayers who apply for the credit. But, there is an argument that the interpretation of the Joint Committee on Taxation is more persuasive than the IRS guidance. The Supreme Court has ruled that, when a federal agency’s interpretation of law is not published under certain specific procedures, the agency’s interpretation is entitled to respect. U.S. v. Mead Corp., 533 U.S. 218 (2001). But, the agency’s interpretation does not control and a court could ultimately side with the Joint Committee on Taxation in interpreting the requirements of the employee retention credit.

On December 21, 2020, however, Congress passed the Consolidated Appropriations Act, 2021 (the “Act”). Among other things, the Act made several changes to the employee retention credit. The Act extends the employee retention credit to July 1, 2021, meaning that an eligible employer can take the credit for wages paid between January 1, 2021, and July 1, 2021. The Act also increases the credit percentage from 50% to 70% and the per-employee limitation from $10,000 for all quarters to $10,000 for any quarter during the extension period. And, the Act modifies the threshold for treatment as a large employer, increasing the threshold to 500 full-time employees. But, the foregoing amendments to the CARES Act apply only to calendar quarters beginning after December 31, 2020. Consequently, the originally-enacted maximum credit and qualified wages definitions apply between March 13, 2020, and December 31, 2020. If President Trump signs the Act, a business with up to 500 full-time and full-time equivalent equivalents could be eligible for the extended employee retention credit.

But, President Trump recently expressed dissatisfaction with the Act and several of its provisions. There is a possibility that President Trump will veto the Act. We are watching out for any changes and will update accordingly.

Mike Sorice is an associate in the Columbus, Ohio office of Walter Haverfield. He assists closely-held businesses with business succession planning, mergers and acquisitions, and tax planning. Mike can be reached at 614-246-2262 or

Vince Nardone is Partner-in-Charge of Walter Haverfield’s Columbus office. He serves as a business advisor to owners and executives of closely-held businesses, counseling them on business planning, tax planning and controversy, cash-flow analysis, succession planning, and legal issues that may arise in business operations. Vince can be reached at 614-246-2264 or