8/23/2021
The IRS issued guidance and clarification on the employee retention credit, including guidance for employers paying qualified wages in the Third and Fourth Quarters of 2021 (after June 30, 2021 and before January 1, 2022); miscellaneous issues that apply to both 2020 and 2021; and the safe harbor that allows employers to exclude certain SBA amounts from gross receipts when determining eligibility.
The Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are required to make. If their employment tax deposits are not sufficient to cover the credit, they may get an advance payment from the IRS.
IRS Guidance on the Employee Retention Credit:
Guidance for Third and Fourth Quarters of 2021
Answers to Questions for Both 2020 and 2021
Safe Harbor Permits Exclusion of Certain SBA Amounts to Determine Eligibility
Reporting
Guidance for Third and Fourth Quarters of 2021 (Notice 2021-49)
The credit is available for the third and fourth quarters of 2021 (after June 30, 2021 and before January 1, 2022)
Eligible employers are expanded to include recovery startup businesses; the amount of the credit allowed can't exceed $50,000 for recovery startup businesses in each of the third and fourth quarters of 2021.
An eligible employer with gross receipts less than 10 percent of gross receipts for the corresponding quarter in 2019 (2020 if they didn't exist in 2019), is a severely financially distressed employer for the third and fourth quarters of 2021.
Employers receiving shuttered venue operators grants or restaurant revitalization grants can't treat the amounts they reported to the Small Business Administration (SBA), or otherwise accounted for as payroll costs, as qualified wages for the employee retention credit in the third and fourth quarters of 2021.
Answers to Questions for Both 2020 and 2021 (Notice 2021-49)
Employers are not required to include full-time equivalents when figuring their average number of full-time employees to determine whether they are large or small eligible employers; an employee’s status as a full-time employee is irrelevant for purposes of identifying qualified wages; wages paid to an employees who are not full-time are qualified wages
Cash tips of $20 or more in a month are treated as wages paid by the employer, and any cash tips treated as wages are qualified wages. The credit is available with respect to unreported tips in an amount equal to the “excess employer social security tax” paid by the employer. No credit is allowed to the extent tips are used to meet the federal minimum wage rate that was in effect on January 1, 2007. Employers are are allowed to receive both the employee retention credit and the Employer Tax Credit for FICA Paid on Tip Income for the same wages.
A reduction in the amount of the deduction allowed for qualified wages, including qualified health plan expenses, caused by receiving the employee retention credit occurs for the tax year in which the qualified wages were paid or incurred. When the employee retention credit is claimed retroactively (relating to the eligibility of PPP borrowers to claim it), an amended tax return or administrative adjustment request (AAR) should be filed for the year the qualified wages were paid or incurred to correct overstated deductions taken for the same wages on the original return
Wages paid to controlling interest holders (more than 50% owners of the corporation's value), including spouses, are not qualified unless the controlling interest holder doesn't have any living relatives.
Safe Harbor Permits Exclusion of Certain SBA Amounts to Determine Eligibility (Revenue Procedure 2021-33)
The safe harbor is elected when these amounts are excluded on employment tax returns to determine eligibility for the employee retention credit for a quarter:
Paycheck Protection Program Loan Forgiveness Amounts
Shuttered Venue Operators Grants
Restaurant Revitalization Grants
Reporting
Total qualified wages and related health insurance costs for each quarter are reported on employment tax returns (i.e. Form 941 Employer's Quarterly Federal Tax Return) for the applicable period. If a reduction in tax deposits doesn't cover the credit, employers may receive an advance payment by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Resources: FAQs Employee Retention Credit under the CARES Act Frequently Asked Questions on Tax Credits for Required Paid Leave Coronavirus Tax Relief