The IRS has issued guidance on the employee retention credit (ERC), including guidance regarding recent changes made to the ERC by the American Rescue Plan Act of 2021, and additional guidance on miscellaneous issues that apply to the ERC in both 2020 and 2021.
Background.
Act Sec. 2301(a) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act; PL 116-136) created a refundable payroll tax credit (“the Employee Retention Credit” or “ERC”). For 2020, the ERC could be claimed by eligible employers who paid qualified wages after March 12, 2020, and before January 1, 2021, if they experienced a full or partial suspension of their operations or a significant decline in gross receipts (“eligible employers”). The credit is equal to 50% of qualified wages paid, including qualified health plan expenses. The maximum credit per employee is $5,000.
In December 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA; PL 116-260) extended the ERC to qualified wages paid after December 31, 2020, and before July 1, 2021, and modified the calculation of the ERC for qualified wages paid in 2021. (TCDTRA Sec. 207)
Act Sec. 9651 of the American Rescue Plan Act of 2021 (ARPA or ARP; PL 117-2) extended the ERC for wages paid after June 30, 2021, and before January 1, 2022, and made a few other changes to the ERC.
The changes made by ARP include, among other things,
- Making the credit available to eligible employers that pay qualified wages after June 30, 2021, and before January 1, 2022,
- Expanding the definition of eligible employer to include “recovery startup businesses”,
- Modifying the definition of qualified wages for “severely financially distressed employers”, and
- Providing that the employee retention credit does not apply to qualified wages taken into account as payroll costs in connection with a 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 ARP.
New guidance.
Notice 2021-49, 2021-34 IRB, which addresses the changes made by ARP to the ERC that are applicable to the third and fourth quarters of 2021, amplifies prior guidance regarding the employee retention credit provided in Notice 2021-20, 2021-11 (see IRS provides guidance for employers claiming the Employee Retention Credit for 2020) and Notice 2021-23, 2021-16 IRB (see IRS provides guidance to employers claiming the employee retention credit for 2021).
Notice 2021-49 also provides guidance on several miscellaneous issues with respect to the employee retention credit for both 2020 and 2021. This guidance includes:
- The definition of full-time employee and whether that definition includes full-time equivalents,
- The treatment of tips as qualified wages and the interaction with the Code Sec. 45B credit (credit for portion of employer social security taxes paid with respect to employee cash tips),
- The timing of the qualified wages deduction disallowance and whether taxpayers that already filed an income tax return must amend that return after claiming the credit on an adjusted employment tax return, and
- Whether wages paid to majority owners and their spouses may be treated as qualified wages.
The Information Release notes that eligible employers report their total qualified wages and the related health insurance costs for each quarter on their employment tax returns (generally, Form 941, Employer’s QUARTERLY Federal Tax Return) for the applicable period. If a reduction in the employer’s employment tax deposits is not sufficient to cover the credit, certain employers may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
To continue your research on the employee retention credit, see FTC 2d/FIN ¶ H-4687.3.
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