As entertainment industry employers continue to grapple with production hiatuses precipitated by the coronavirus (COVID-19) pandemic, production companies may be pleased to learn they could be eligible for employee retention credits (“ERCs”) through Entertainment Partners’ (EP) quarterly federal tax return Form 941 (FICA/employee income tax withholdings) under the newly-enacted Coronavirus Aid, Relief, and Economic Security, or CARES, Act. The Act addresses the financial fallout the pandemic has caused by infusing the U.S. economy with over $2 trillion of relief. A key portion of the Act, and one that is of great interest to entertainment-industry employers, concerns ERCs. ERCs serve as a credit against employment tax liability on the quarterly federal tax return Form 941 equal to fifty-percent (50%) of each applicable employee’s qualified wages paid after March 12, 2020 and before January 1, 2021, up to $10,000 in aggregate qualified wages per employee. Thus, the maximum per-employee credit that is available is $5,000.
As explained below, production company clients do not have standing to claim the ERC on their own because EP as the statutory employer files the applicable Form 941 under EP’s own taxpayer ID for the subject production workers on a consolidated basis. To assist clients in securing the ERCs as expeditiously as possible, EP will consult with clients to identify qualifying client wage payments/health care expenses and report the ERCs through EP’s Form 941 quarterly return. EP in certain cases will be able to refund ERCs to clients before EP files its Form 941 quarterly return.
To be eligible for ERCs, an employer must (a) not have received a small business “paycheck protection” loan, (b) have carried on a trade or business in 2020; and (c) have experienced one of two qualifying events (as described herein). The employer must have either (i) fully or partially suspended its operations in response to a governmental order mandating business closures due to the COVID-19 outbreak or (ii) experienced a decline in gross receipts of more than fifty percent (50%) when compared to the corresponding calendar quarter of the prior year. If an employer qualifies under the suspension test (condition (i)), the qualification lasts until the employer is no longer under a full or partial suspension. If an employer qualifies under the gross-receipts test (condition (ii)), the qualification continues through the end of the quarter in which gross receipts exceed 80% of gross receipts in the corresponding quarter in the prior year. An employer may qualify under both tests. The Department of the Treasury has not issued guidance on the applicability of the gross-receipts test for employers without any activity in the prior year. Guidance has been issued that provides examples of a “partial shutdown” in the suspension test.
Further, the ERC provisions of the CARES Act operate differently depending on whether the employer has, on average, greater than 100 full-time employees or 100 or fewer full-time employees. In determining the average, the employer must assess its prior calendar year of activity to count its full-time headcount under the Affordable Care Act’s (ACA) rules. The ACA provides that an employee must be scheduled to work at least 130 hours per month to count as a full-time employee, and considers part-time employees before determining the actual full-time employee count. Moreover, if an employer is part of a controlled group (meaning generally that another legal entity owns at least eighty percent (80%) of the employer), then all full-time employees of the controlled group are aggregated for employer coverage purposes under the CARES Act. Finally, if an employer does not have any prior-year activity, then the full-time headcount is determined based on the employer’s reasonable expectation of current-year full-time headcount.
If an eligible employer averages greater than 100 full-time employees, only qualified wages paid to employees who do not provide services for the employer during the period of activity in which the suspension test or gross-receipts test is met are eligible for the ERCs; wages paid to employees who continue to provide services for the employer are ineligible. If an eligible employer averages 100 or fewer full-time employees, qualified wages paid to all employees, even those that continue to perform services for the employer, are eligible for the ERCs. In either instance, “qualified wages” include employee health insurance costs that would be allocable to the qualified wages under an employer-sponsored health plan. However, qualified wages do not include wages paid under the Families First Coronavirus Relief Act sick/family medical leave credit provisions.
Qualified wages for an employer that averages greater than 100 full-time employees cannot exceed the amount that would have been paid to the employee for an equivalent duration during the preceding 30 days. Further, the amount of ERCs a qualified employer receives will be reduced by the amount of any credit the employer has taken for the employment of qualified veterans or for small business research costs. Finally, the ERC provisions of the CARES Act treat members of a controlled group as a single employer, which precludes situations in which qualified wages are paid by multiple members of the controlled group to the same employee. The practical implication of this treatment is that the maximum per-employee ERC available to a controlled group is $5,000.
Eligibility to Claim the Credit and How to Claim the Credit
The common-law employer is entitled to the ERC and, in most circumstances, takes the credit against its employment tax liability on the Form 941 (FICA & income tax withholdings) quarterly return containing the subject employees’ wages. In the entertainment industry, however, production companies (i.e., common-law employers of production workers) cannot claim the credit directly with the IRS because they do not file the Form 941 quarterly return if they have engaged an Internal Revenue Code § 3512 motion picture project employer payroll company (MPPE), such as EP, to pay their production workers. EP acts as the statutory employer under federal tax law (IRC §§ 3512 and 3401(d)(1)) and therefore files the applicable Form 941 FICA return which reflects all of the consolidated wages EP has paid to the subject production workers. The Department of Treasury has not addressed the procedure for Section 3512 or 3401(d)(1) statutory employers to follow in reporting ERCs on behalf of their client production companies. It has issued guidance limited to employer agents under IRC § 3504 and certified PEOs under IRC § 3511 because they file a Schedule R with their Form 941 returns listing gross wages and taxes for each respective common-law employer. This guidance does not apply to MPPEs – which as noted are governed specifically by Sections 3512 and 3401(d)(1)) – because they have different Form 941 tax filing requirements and do not file a Schedule R with their Form 941.
Entertainment Partners’ Assistance
To facilitate our clients’ ability to receive ERCs, EP will secure the ERC for our clients on an expedited basis by (i) identifying qualifying wage payments and related health care expenses in consultation with our clients; (ii) reporting the ERCs through EP’s Form 941 quarterly return; and (iii) in certain circumstances refunding the ERCs to our clients before EP has filed its Form 941 quarterly return. Further, if you are a current EP Cares client or receive ACA-related services from EP, EP may assist you in determining your average number of full-time employees for ERC qualification under the CARES Act. In either case, if you plan to apply for the ERCs, please email us at firstname.lastname@example.org. EP will respond to you with more details on securing the credit on your behalf shortly after the publication of this Alert.
For any questions about this alert, you may contact:
Joseph Scudiero, Senior Vice-President & Chief Labor Counsel
Scott Bishop, Vice-President, Employment Law
Becky Harshberger, Vice-President, Payroll Tax
James Klima, Senior Contracts & Corporate Law Counsel