Armanino Blog

Digging Deeper Into the CARES Act Employee Retention Credit

by Jenn McCabe
April 16, 2020

Updated April 20, 2020.

The ultimate goal of the CARES Act employee retention credit is to help employers who continue to pay wages — rather than doing layoffs — despite great economic difficulty. Every employer should start by determining their eligibility. Under the guidance, economic misfortune is defined as either business interruption due to a partial or full government ordered shutdown or a loss of at least 50% of gross receipts when compared to the same quarter in 2019.

The credit is 50% of wages per quarter, up to a maximum eligible wage of $10,000. In other words, the maximum credit is $5000/person. This credit is applied to the employer’s quarterly tax liability reported on Form 941. The credit applies to wages paid between March 12 and December 31, 2020.

We can drill down into the meaning of “partial shutdown” using industry examples.

  1. The simplest example is a restaurant that is under orders not to serve meals in the restaurant but is continuing to serve take-out meals. The restaurant in this example is “partially” shut down. If the restaurant continues to pay wages to staff who are not working, a credit of up to $5000/person can be applied to employment taxes. (See our FAQ for details on the calculation.)
    • If the restaurant has more than 100 staff (chain restaurants are a common example), only the wages paid to non-working staff are eligible for the credit.
    • If the restaurant has 100 or less staff, all the wages paid are eligible for the credit, even those wages paid to people who are able to render service (take-out or delivery people, for example).
  2. Businesses with both a corporate office and a factory are another “partial” shutdown example.
    • The factory workers who are unable to work and are sent home due to a government order are paid eligible wages.
    • The corporate office staff may be functioning and able to work from home. Here credit eligibility depends on the company size.
    • If the company has 100 or less employees, all wages paid are eligible for the credit, and if they have more than 100, only the wages paid to idle factory workers are eligible.
  3. Service businesses present a more complex example. At the end of March, many businesses were under orders to send their staff home. It’s clear already that the second quarter of 2020 will be just as disrupted by government orders to stay at home.
    • Many service businesses adapted quickly to a “work from home” status. Their staff, while perhaps distracted by family, are at least able to perform their duties. None of these salaries are eligible for the credit, even if the business is partially shut down.
    • Staff who can’t function fully due to a partial shutdown (administrative staff, for example) would be paid eligible wages for the time they are not able to perform their usual job duties.
    • The key to getting tax credits for staff who are working at less than full capacity and still getting paid is documentation. The paid “unproductive time” has to be documented via timesheets in the payroll records and by Human Resources memos to the staff acknowledging the disparity between pay and productivity. (This is essentially additional company COVID-19 paid time off, in excess of the usual policy.)
    • To get any credit in this situation requires excellent coordination between the HR, payroll and accounting teams.
  4. Our last example is an illustration of how this credit can be used throughout the year 2020. Say our sample company experiences a partial shutdown in March though early May 2020. Let’s assume the company starts to recover at the end of the second quarter, and that the company has more than 100 staff. The company has continued to pay 500 production workers even though they have not been able to come to work since March 13. The company has also paid 300 office workers who have been working from home.
    • The company has a partial shutdown, so any production wages paid after March 12 can be considered eligible for the credit in the first quarter. During the second quarter, this strategy continues.
    • In the third quarter, let’s assume there is no government shutdown. Some of the production staff is back at work, but the company is now experiencing a dramatic 60% drop in receipts and qualifies for the credit again. The credit is calculated on the wages of the workers who are still not back to work but are still on payroll.
    • In the fourth quarter, business picks up; the receipts are now 82% of fourth-quarter 2019. Even though not all the workers are back on the job, the company is no longer eligible for the credit.

Exempt and Non-Exempt Eligible Wages and the Retention Tax Credit

For an hourly or non-exempt worker, it should be relatively easy to document paid, nonworking time. The hours paid that are not productive are the basis for the tax credit.

For an exempt worker, it’s more complicated. Exempt workers are paid for the entire week that they are on active payroll, even if they work less than full time. The entire week is ineligible for the credit unless there are clear timesheet records and HR policies documenting the full pay and the less-than-full work week.

Paid (Vacation) Time off and the Retention Tax Credit

If a company has accrued for vacation or paid time off, we recommend that employees use that time first. The employer has the right to direct staff to use their accrued time to pay for days that they are not working. As a financial strategy, this reduces the company’s accrued vacation liability at a time that reduction of any liability is sound judgement.

After that time has been exhausted, the company can furlough, lay off, reduce pay, or simply keep paying staff. If the company continues to pay wages, reduced or not, the employee retention credit applies.

Keys to Success

Record keeping for paid time of unproductive workers is crucial for employers with more than 100 staff, or employers who need to allot wages that are a mix of working and nonworking time. This takes teamwork. You’ll need to have solid HR expertise and a savvy payroll team to support the financial and tax strategies implemented by the CFO’s office.

Have questions or need some help? Don’t hesitate to reach out to our experts. For more information on keeping your business running during disruption, visit our COVID-19 Resource Center.

April 16, 2020

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Jenn McCabe - Partner, Outsource HR - El Segundo CA | Armanino
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