What employers need to know about the CARES Act Employee Retention Payroll Tax Credit

As we previously discussed, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) provides an employee retention payroll tax credit against employment taxes owed by certain eligible employers impacted by COVID-19 (the “Employee Retention Payroll Tax Credit”). The Employee Retention Payroll Tax Credit is generally equal to 50% of the “qualified wages” paid to an employee.

The Joint Committee on Taxation recently published its summary of the tax provisions in the CARES Act (the “JCT CARES Summary”). The following is a summary of the guidance provided by the JCT CARES Summary.

Eligible employer

An employer is generally an “eligible employer” to the extent such employer conducts a trade or business during 2020 and such employer either (i) was required by a governmental authority to fully or partially suspend its trade or business during such calendar quarter because of COVID-19 or (ii) experienced a significant decline in gross receipts.

The JCT CARES Summary provides the following examples of when an employer’s operations are partially suspended by a governmental authority:

• A restaurant that is only permitted to offer take-out service under a governmental order meets the governmental order test.
  
  
• A concert venue that is only permitted to host gatherings of 10 or few people under a governmental order.
  
  
• An accounting firm required by a governmental order to cease all activities other than minimum basic operations, that closes its offices, and does not require employees who cannot work from home to work (e.g., custodial employees and mail room employees).

Based on the JCT CARES Summary and the FAQs published by the Internal Revenue Service, it appears clear that employers not permitted to operate in a normal capacity as required by a governmental authority are eligible employers for purposes of the Employee Retention Payroll Tax Credit.

Please note that, even though an employer qualifies as an eligible employer, an employer must still analyze whether wages paid to an employee are “qualified wages” for purposes of the employee retention payroll tax credit.

Qualified wages

The amount of the Employee Retention Payroll Tax Credit generally equals 50% of the “qualified wages” paid when an employer was an “eligible employer” as discussed above. However, (i) the amount of “qualified wages” taken into account for an individual employee shall not exceed $10,000; and (ii) only wages paid after March 12, 2020, and before January 1, 2021, can qualify as “qualified wages.”

With respect to employers with 100 or fewer employees, all wages paid to an employee (whether or not an employee is able to provide services) during the period in which the employee is an eligible employer can constitute “qualified wages” for purposes of the Employee Retention Payroll Tax Credit. With respect to employers with greater than 100 employees, only wages paid to an employee during the period in which the employee is not providing services and the employer is an “eligible employer” can constitute “qualified wages” for purposes of the Employee Retention Payroll Tax Credit.

There have been some questions as to what it means for an employee to not be “providing services” for purposes of the Employee Retention Payroll Tax Credit; specifically, some employers have questioned whether wages paid to an employee with decreased utilization (but still working a normal schedule) because of COVID-19 are eligible for the Employee Retention Payroll Tax Credit.

The JCT Cares Summary provides the following examples of when an employee is not providing services:

• If a restaurant that had an average of 150 full-time employees during 2019 meets the governmental order test, and the restaurant continues to pay kitchen employees’ wages as if they were working 40 hours per week but only requires them to work 15 hours per week, the wages paid to the kitchen employees for the 25 hours per week for which the kitchen employees are not providing services are qualified wages.
  
  
• If an accounting firm that had an average of 500 full-time employees during 2019 meets the governmental order test, and during the period in which the governmental order is in place, the accounting firm closes its office and does not require custodial and mail room employees to work but continues to pay them their full salaries, wages paid to those custodial and mail room employees for the time they do not work are qualified wages.
  
  
• If the accounting firm continues to pay administrative assistants their full salaries but only requires them to work two days per week on a rotating schedule reflecting reduced demand for assistance resulting from the office closure, the portion of an administrative assistant’s salary attributable to days not worked are qualified wages.

Each of the examples in the JCT Cares Summary provides situations in which an employer does not require an employee to work during a time when the employer was an eligible employer. While still not free from doubt, wages paid to an employee who is scheduled to work but not being fully used because of COVID-19 appear ineligible for the Employee Retention Payroll Tax Credit. Eligible employers with employees who are scheduled to work but not being fully used should consider alternative working arrangements for employees to take advantage of the Employee Retention Payroll Tax Credit.

Edward Buchholz and Rick Lawton are members of Thompson Coburn LLP’s Tax Group.

Click here to subscribe to News & Insights from Thompson Coburn LLP related to our practices as well as the latest on COVID-19 issues.