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Employee Treatment Remains a Mystery for CARES Act Tax Credit

Posted on May 7, 2020

Businesses looking to receive refundable employment tax credits still aren’t sure how to treat wages paid to salaried and part-time employees, even after the latest round of IRS guidance.

For some larger businesses that averaged more than 100 employees for 2019, wages paid to workers who aren’t currently providing services can qualify for the new employment tax credit. But under new guidance released by the IRS, it’s not entirely clear how payments to exempt salaried employees who aren’t working can qualify, according to Kevin M. Jacobs of Alvarez and Marsal Taxand LLC.

If an employee steadily works consistent hours, it’s easier to determine if they are no longer providing services. But that’s not the case for a restaurant manager whose hours fluctuate when the standard for providing services is based on hours previously worked or some other measure because the range of hours worked could be so broad, said Jacobs, a former senior technician reviewer with the IRS Office of Associate Chief Counsel (Corporate).

FAQ 55, released as part of a broader guidance package by the IRS April 29, provided some guidance on the topic, and even gave an example of how a large fitness club could keep paying its salaried managers and receive a credit, even though their hours have only been reduced. But some industries are still looking for more insight.

“There are still some questions in the context of salaried employees,” Jacobs said, but added that the recent guidance was helpful on several other aspects of the credit regime.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) gave employers options for paying workers during the economic shutdown as the nation tries to halt the spread of COVID-19. The options include an employee retention credit that is fully refundable and applied against the employer’s portion of payroll taxes. Employers can forgo that credit and instead apply for a new loan under the CARES Act to help with payroll costs, referred to as the Paycheck Protection Program.

Obtaining the employee retention credit requires taxpayers and practitioners to go through the statute and IRS guidance methodically to see if employers qualify.

The credit is equal to 50 percent of qualified wages paid by eligible employers to employees from March 12, 2020, to January 1, 2021. The credit is fully refundable, and the maximum amount of wages applicable for each employee for all calendar quarters is $10,000. That means the maximum employer credit is $5,000 per employee.

An eligible employer for the credit must carry on a trade or business during calendar year 2020 and either completely or partially suspend operations in any calendar quarter of 2020 because of government orders limiting commerce, travel, or group meetings, or the employer must have a significant decline in gross receipts during the calendar quarter.

A “significant decline in gross receipts” starts in the first quarter in which an employer’s gross receipts are less than 50 percent of the company’s gross receipts for the same quarter in 2019. The decline ends with the first quarter in which the employer’s gross receipts are greater than 80 percent of its gross receipts for the same quarter in 2019.

Practitioners also must determine what constitutes qualified wages for the credit.

If an employer has more than 100 full-time employees, qualified wages are those paid to employees for the time they aren’t providing services because of a full or partial suspension of operations by governmental authority or when there is a significant decline in receipts. For employers that averaged 100 or fewer employees in 2019, qualified wages are those paid to any employee in the economic hardship described above, but regardless of whether the employees are providing services.

Counting to 100

Jacobs said that when companies are determining whether they averaged 100 employees to determine who must be paid to receive the credit, the law doesn’t specify whether the company counts only full-time employees or also full-time equivalent employees.

There are several places where the determination of full-time employees includes full-time equivalent employees. For purposes of the retention credit, Jacobs said the CARES Act cross-references section 4980H for the definition of a full-time employee. Section 4980H defines the phrase as someone who works at least 30 hours a week, and Treasury regulations expand the phrase to also include someone who works 130 hours a month.

Jacobs said it’s noteworthy that within section 4980H, full-time equivalent employees are treated as full-time employees solely for the limited purpose of determining whether the employer is a large employer. 

“That doesn’t mean you include them in the definition of full-time employees,” Jacobs said, referring to the determination of counting to 100 employees for the retention credit. “In measuring the 100 employees, you have that outstanding question of do you or don’t you include them.”

Jacobs said language in the FAQ suggests that businesses count full-time equivalent employees in the determination, but it’s not entirely clear.

Part-Time Problem

Lawyers at White and Williams LLP said one question that’s come up when analyzing the credit is how it works when a company has mostly, or sometimes all, part-time employees.

L. Stephen Bowers said full-time employees are included for purposes of counting to 100 under the credit regime, but the language on how the credit actually operates refers to the wages definition in the law, which picks up part-time employees. One could argue that a business needs full-time employees to qualify for the credit regime, but then once it does, the payments to part-time employees could also qualify, he added.

In other words, if a business has 30 part-time employees, it’s unclear under the current guidance whether the business gets a credit at all. John J. Eagan said he thinks that business should qualify for the credit because the wages credit is just to decide which payments to employees qualify for the wages under the 100-employee test.

“It’s an issue that we continue to get asked and can’t definitively answer, but we say based on the interpretation of the statute, you can count part-time people,” Eagan said. Bowers said he can’t imagine Congress intended to allow the credit only for wages paid to full-time employees, but added that he’s surprised the IRS hasn’t addressed this issue so far in its guidance.

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