Having been in the taxation and tax policy field for over 30 years, I've spent a lot of time studying, researching, speaking, testifying and writing about tax reform. Since early March 2020 with the COVID administrative and legislative changes and proposals, I can't recall a busier and more complex time so far as tax changes go. There have been a lot of changes enacted quickly. Drafters are doing a great job. Issues easily arise as to interpretation though due to lack of time for adequate review and discussion prior to enactment and due to the volume of changes. Hopefully areas of confusion can be resolved soon so individuals and businesses in need of the legislated assistance can take advantage of the benefits without worry that they may have to give them back later.
I have spend a lot of time over the past many weeks on the following multi-faceted (complex) provisions:
1st - The required paid sick and medical/family leave for employers with under 500 employees in the Family First Coronavirus Response Act (FFCRA) (PL 116-127; 3/18/20). The required salary payments produce refundable payroll tax credits for the employer. And, equivalent credit is provided for self-employed individuals. Between the Dept. of Labor and IRS, there are about 200 FAQs to help explain these provisions!
2nd - The Employee Retention Credit and OASDI deferral of the CARES Act (PL 116-136; 3/27/20). The ERC helps employers who continue to carry on business and pay wages despite facing one of these two tests/reasons:
1) Government Order Test: Business operations were fully or partially suspended due to government orders limiting commerce, travel, or any group meetings due to COVID-19 [see FAQ 28 to 38]; OR
2) Reduced Gross Receipts Test: Employer’s gross receipts (per §448(c) definition) are less than 50% of gross receipts for the same calendar quarter of 2019, AND ending with the quarter following the first quarter where gross receipts exceed 80% of gross receipts for the corresponding 2019 quarter [see FAQ 39 – 46]
The key point I want to make for this post (beyond the complexity* of the provisions) is that there is an interpretative issue with the ERC that is significant for many employers. The ERC works differently for employers based on the number of full-time employees they had in 2019. Full-time means working on average at least 30 hours per week. If an employer had 100 or fewer full-time employees in 2019, then if reason 1 or 2 is met for wages paid from March 13 to December 31, 2020, all of the wages count towards the ERC (but limited to $10,000 per employee or a credit of $5,000 per employee). If an employer had over 100 full-time employees in 2019, then the qualified wages are only those paid to employees for NOT working.
Well, how do you count full-time employees? Here is the challenge. The Joint Committee on Taxation states that full-time equivalent (FTE) employees are included (see footnote 145 in the JCT CARES Act report) while the IRS states that only full-time employees are counted (FAQ 49).
Now for many employers, they will reach the same result under either calculation. For example, an employer with ten employees working at least 30 hours per week in 2019 and another ten working twenty hours per week, is a small employer under both definitions.
But let's consider an extreme example to highlight a point that makes the JCT interpretation more equitable (although that doesn't mean it is what Congress intended). Suppose Employer X had 120 full-time employees in 2019 and each worked 30 hours per week and there were no other employees. Clearly, X is a large employer under both the JCT and IRS definitions. In contrast, Employer Y had 240 employees all of whom worked 15 hours per week in 2019, and no full-time employees. Under the JCT definition, Y is a large employer, but under the IRS definition, it is not (no full-time employees in 2019). The ERC calculation is significantly different for Y under the JCT interpretation (only generated for wages paid for hours not worked) while under the IRS definition the credit is based on all wages paid (assuming Y meets reason 1 or 2 above).
Query: Aren't X and Y the same size in terms of hours worked by all employees in 2019? Seems so. This is likely why the JCT footnote 145 says include FTE employees. Also, the law refers to IRC section 4980H to define full-time employees which is not clear as to whether that reference is solely for the definition of at least 30 hours per week to be full-time or to also include FTE employees used for section 4980H to determine if an employer is an "applicable large employer" subject to the employer mandate to offer health insurance to its full-time employees and their dependents up to age 26. The text at section 2301 of the CARES Act is brief and doesn't specifically mention FTE employees. But then, why does it even refer to section 4980H rather than just say full-time means at least 30 hours per week?
Hopefully this issue can be resolved soon so affected employers can correctly calculate and claim their refundable ERC to help them in these challenging times.
What do you think?
*I'll share a personal example on the complexity of these employment tax provisions, I have well over 30 hours devoted to figuring out just the three employment tax provisions to present webinars on them of one to two hours in length!
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