IRS Gives New Guidance on Employee Retention Credit
The Treasury Department and the Internal Revenue Service recently issued further guidance on the employee retention credit. Notice 2021-49 addresses changes made by the American Rescue Plan Act of 2021 (ARP) to the employee retention credit that are applicable to the third and fourth quarters of 2021. It also includes guidance on several miscellaneous issues with respect to the employee retention credit for both 2020 and 2021.
Extension of Employee Retention Credit
The credit is available to eligible employers that pay qualified wages after June 30, 2021, and before January 1, 2022.
WM Wisdom:
Eligible employers can claim ETC for 3rd and 4th quarter of 2021.
New Eligible Employer
“Recovery Startup Businesses” is a business that was launched after Feb. 15, 2020, with gross receipts that do not exceed $1 million. The credit is capped at $50,000 in aggregate for all employees for each of the 3rd and 4th quarters of 2021 ($100,000 max).
Qualified wages for “severely financially distressed employers”
Businesses that had gross receipts decrease over 90% in Q3 or Q4 of 2021 vs 2019 are considered severely financially distressed employers.
An employer with any number of full-time employees in 2019 can qualify for “small employer” eligibility if it constitutes a “severely financially distressed employer”.
WM Wisdom:
A large eligible employer (more than 500 full time equivalent employees in 2019) may treat all wages paid to its employees during the quarter in which the employer is considered “severely financially distressed” as qualified wages.
Coordination with Certain Programs
The employee retention credit does not apply to qualified wages taken into account as payroll costs in connection with other grants such as the shuttered venue grant under Section 324 of the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, or a restaurant revitalization grant under Section 5003 of the ARP.
Full-time employee and Full-time equivalents
For purposes of determining whether an eligible employer is a large eligible employer or a small eligible employer, eligible employers are not required to include full-time equivalents when determining the average number of full-time employees.
However, for purposes of identifying qualified wages, an employee’s status as a full-time employee is irrelevant and wages paid to an employee who is not full-time may be treated as qualified wages if all other requirements to treat the amounts as qualified wages are satisfied.
Treatment of tips as qualified wages and the interaction with the Section 45B credit
Any cash tips received by an employee in a calendar month of $20 or more, are treated as qualified wages.
Section 45B provides a tax credit for employer social security and Medicare taxes paid on certain employee tips. The credit is an amount equal to the tax paid by an employer on its employees’ tip income without regard to whether the employees reported the tips to the employer.
Eligible employers can receive both the employee retention credit and the Section 45B credit for the same wages.
Amending Income Tax Returns for ERC Credits
The taxpayer should file an amended federal income tax return or administrative adjustment request (AAR), if applicable, for the taxable year in which the qualified wages were paid or incurred to correct any overstated deduction taken with respect to those same wages for which ERC is received.
Related Individuals
Wages paid to employees who are “related individuals” are not “qualified wages” for ERC purposes. A related individual is any employee who has of any of the following relationships to the employer:
- A child or a descendant of a child
- A brother, sister, stepbrother, or stepsister
- The father or mother, or an ancestor of either
- A stepfather or stepmother
- A niece or nephew
- An aunt or uncle
- A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
If the employer is a corporation, then a related individual is any person that bears a relationship described above with an individual owning, directly or indirectly, more than 50% in value of the corporation’s outstanding stock.
If the employer is an entity other than a corporation, then a related individual is any person that bears a relationship described above with an individual owning, directly or indirectly, more than 50% of the capital and profits interests in the entity.
WM Wisdom:
Eligible employers are still able to take advantage of the employee retention credit against applicable employment taxes and qualified wages paid to their employees through Dec. 31, 2021. Although the program is set to sunset at the end of 2021, the credit can be claimed on amended payroll tax returns as long as the statute of limitations remains open.
If you have questions and would like to speak with one of our accounting professionals, please contact us.
To read Notice N-2021-49, please click here.
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