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.
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:
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.
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:
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.
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