Another employee retention credit has come up. The question was submitted to me by an attendee in one of my webinars: Pertaining to wages paid in the first quarter after 3-12, does the entire paycheck qualify or only the portion of the paycheck that would be for days paid for hours worked after 3-12?
The person went on to say they had read through all 90+ FAQs on the IRS website and nothing addresses the basic issue of: is the ERC based on wages paid or wages incurred? And that is true, the IRS FAQs don’t answer that question.
So we turn to the CARES Act.
The CARES Act
Section 2301 of the CARES Act is the ERC section. Then, go to (3)(c)(B), “limitations.” At that spot, it says the following, with the answer in the first 5 words:
Qualified wages paid or incurred by an eligible employer described in subparagraph (A)(i) with respect to an employee for any period described in such subparagraph may not exceed the amount such employee would have been paid for working an equivalent duration during the 30 days immediately preceding such period.
This section is actually setting out a limit on what a business with more than 100 employees — that is what “subparagraph (A)(i) is — can count as wages toward the ERC, with the limit being no more than the worker was paid in the 30 days prior to the start of the period. The example the IRS uses in FAQ 53 is of a business that pays people “hazard pay” — the hazard pay doesn’t count, only the part that would be considered “normal wages” counts. This limitation only applies once a company gets past 100 employes.
Anyway, with all that being said, the first part of the section says “wages paid or incurred,” and so it seemingly answers the question posed at the beginning.
So, the ERC started on March 13th, for wages from that point through December 31st. Let’s say a business qualified for the ERC in the first quarter, and had a payday on March 13th.
Those wages are “paid” during the qualifying period, but all of the wages would have been “incurred” prior to the qualifying period. Based on 2301(3)(c)(B), it looks like the wages paid on March 13th would count toward the ERC, even though they were incurred prior to March 13th, because they were “paid” during the qualifying period.