The Employee Retention Credit is a refundable tax credit that may be applied toward certain employment taxes and is calculated as a percentage of the qualified wages that an eligible employer pays to employees after March 12, 2020, subject to a number of restrictions.
The ERC was established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and its termination date was set on the 31st of December in the year 2020.
The ERC has been given additional time, up until the 30th of June in 2021, according to the Consolidated Appropriations Act (CAA) of 2021.
Additionally, the ERC rate of credit was increased from 50 percent to 70 percent of eligible wages as a result of the CAA.
ERC funding will be extended from the 30th of June in 2021 to the 31st of December in 2021 according to the American Rescue Plan Act (ARPA). ARPA in addition:
- lowers the minimum needed year-over-year decline in gross revenues down from 50 percent to 20 percent;
It creates a safe harbor for employers, enabling them to evaluate eligibility based on gross receipts from the preceding quarter;
- raises the cap on the amount of wages that can be counted as creditable from a total of $10,000 to $10,000 each calendar quarter (thus, for example, $10,000 for the first quarter of 2021 and $10,000 for the second quarter of 2021); and
- extends the 100-employee demarcation for determining the relevant qualifying wage base to employers with 500 or less employees (this indicates that wages qualify for the credit regardless of whether or not the employee is working); (small eligible employer definition).
Public notice 2021-49
Our investigation takes a more in-depth look at the manner in which the Notice responds to inquiries that have been raised to the Treasury Department and the Internal Revenue Service on the ERC.
The meaning of the term “full-time employee.”
The question of whether or not “full-time equivalents” (as defined by Code Section 4980H(c)(2)(E)) are taken into account when determining whether or not an eligible employer is a large eligible employer or a small eligible employer is addressed in the notice. The Notice makes it clear that “full-time equivalents” do not need to be considered when determining the average number of full-time employees. However, with regards to “qualified wages,” an employee’s position as a full-time employee is “irrelevant because wages provided to an employee who is not full-time may be recognized as qualified wages if all other requirements to treat the amounts as qualified wages are met.”
The inclusion of tips in the calculation of qualifying wages.
The Notice provides clarification that qualified wages are limited to wages as defined under Code Section 3121(a) and compensation as defined under Code Section 3231(e), including qualified health plan expenses, and for calendar quarters in 2021, remuneration paid for services rendered to certain governmental employers. The notice indicates that cash tips of $20 or more received each month are considered “wages” or “compensation” under Code Section 3121(a) and Code Section 3231(e), and that as a result, they may be considered qualifying wages if all of the other requirements are met.
Credit under Section 45B.
The Internal Revenue Service has been asked about the possibility of an employer claiming both the ERC credit and the Section 45B credit on the same wages. The Code Section 45B credit may be claimed on the employer’s share of FICA taxes on excess tips received by its employees “in connection with the providing, delivering, or serving of food or beverages for consumption if the tipping of employees delivering or serving food or beverages by customers is customary” (Code Section 45B(a); Code Section 45B(b)(2)). According to Section 45B(b)(1) of the Internal Revenue Code, the credit is equal to the amount of FICA tax that the employer paid on the percentage of tips that exceeded the amount that was considered to be wages for the purpose of fulfilling federal minimum wage requirements. According to the Notice, the CARES Act and subsequent laws do not contain a provision that prohibits the receipt of both the ERC and the Code Section 45B credit for the same wages. As a result, employers are entitled to claim both the ERC and the Code Section 45B credit for the same wages.
Regarding the timing of the disallowance of qualifying wage wages.
It was clarified in Notice 2021-20 that in accordance with Code Section 3134(e) and Section 2301(e) of the CARES Act, the amount of an employee retention credit might reduce an employer’s deduction for qualifying wages, which can include qualified health plan expenditures. The Internal Revenue Service (IRS) provided clarification that when a taxpayer claims a retroactive credit to a retroactive adjustment, such as the eligibility of PPP borrowers to claim the ERC, or files an amended employment tax return to claim the ERC, the taxpayer is also required to 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 for those same wages on the original tax return Tracing back to the exact wages that resulted in the applicable credit is required by Section 280C(a) of the Code. In order for the taxpayer to meet this tracing requirement, they are required to file either an updated return or an AAR, depending on the circumstance.
Wages of majority owners as well as spouses of majority owners
The notice addresses the question of whether or not wages paid to an employee who owns more than 50 percent of the value of a corporation (majority owner) may be treated as qualified wages. It also addresses the question of whether or not wages paid to the spouse of a majority owner may be treated as qualified wages.
The CARES Act, in general, sets standards for ERC purposes that are comparable to those found in Code Section 51(i)(1), which pertain to the Work Opportunity Credit. The Notice makes it clear that in the event that the majority owner of a corporation does not have any brothers or sisters (whether by whole or half-blood), ancestors, or lineal descendants as defined in Code Section 267(c)(4), then neither the majority owner nor the spouse is a related individual within the meaning of Code Section 51(i)(1), and the wages paid to the majority owner and/or the spouse are qualified wages for the purposes of the employee retention credit, provided that the other requirements for qualified wages are The Notice offers many illustrations to elucidate this matter, including one in which it is possible that the wages of a majority owner or spouse will not be considered qualifying wages.
For instance, Individual L owns 34 percent of Corporation D, whereas Individual M owns 33 percent, and Individual N owns 33 percent of Corporation D. Individuals L, M, and N are all related to one another as their siblings. With regard to the first three months of the calendar year 2021, Corporation D qualifies as an eligible employer. Corporation D has Individual L, Individual M, and Individual N working for it as employees. Individuals L, M, and N are all considered to have a hundred percent ownership stake in the business because of the attribution standards outlined in Section 267(c) of the Code. Individuals L, M, and N are related to one another in the manner that is specified in Section 152(d)(2) of the Code (B). As a consequence of this, Corporation D is not permitted to count any wages given to Individual L, Individual M, or Individual N as qualifying wages.
Alternative quarter election for calendar quarters in 2021.
According to the provisions of Notice 2021-23, the decision of whether or not an employer is an eligible employer is based on a decline in gross revenues, and this determination is conducted individually for each quarter. Employers are not compelled to make regular use of the alternate quarter election. For instance, an employer may be considered an eligible employer despite a decline in gross receipts for the second quarter of 2021 if its gross receipts for the second quarter are equal to 75 percent of its gross receipts in the second quarter of 2019 (i.e., the employer does not rely on the alternative quarter election for the second quarter); the employer could then use the alternative quarter election to be considered an eligible employer for the third quarter of 2021.
Notice 2021-20 includes a safe harbor for gross receipts.
The notice indicates that the procedures given by Notice 2021-20 for determining gross revenues for an employer that came into existence in 2019 may be implemented for employers that came into existence in the middle of 2020.
For instance, an employer that started operations in the third quarter of 2020 should use that quarter as the base period to determine whether it experienced a significant decline in gross receipts for the first three quarters in 2021. Additionally, the employer should use the fourth quarter of 2020 for comparison to the fourth quarter of 2021 to determine whether it experienced a significant decline in gross receipts.
IRS call center for the payroll business
During a payroll industry call held by the IRS on August 5th, the agency emphasized the following two categories of ERC qualified businesses:
- Recovery enterprises just getting started. During the conversation, the IRS mentioned that the existing laws do not define what kinds of wages are considered qualifying for the purpose of claiming the ERC by a recovering beginning business. A business is considered a recovery startup if it meets the following criteria: (1) it began operations after February 15, 2020; (2) its average annual gross receipts for a three-taxable-year period ending with the taxable year which preceded such quarter did not exceed $1,000,000; and (3) it experienced a full or partial suspension of operations due to an order from the government or a significant decline in gross receipts. The Internal Revenue Service (IRS) provided clarification through a spokesman that a business may consider all wages received to an employee during the quarter to be qualifying wages if the organization is a recovery startup business and a small eligible employer (Code Section 3134(c)(3)(A)(ii)). In addition, aggregation criteria do play a role in the process of determining whether or not a business is a recovery starting business. In the end, the Internal Revenue Service (IRS) came to the conclusion that it is acceptable for a tax-exempt (Code Section 501(c)) organization to qualify as a recovery startup business as long as the organization satisfies all of the requirements.
- Employers who are in a severe state of financial crisis. According to information provided by the IRS, employers that are in a severe state of financial difficulty may be eligible to claim the ERC for qualifying wages earned during the same quarter that they are claiming the credit.
The IRS strongly recommends using electronic filing for payroll tax returns.
The Internal Revenue Service has sent out a reminder to employers that the next quarterly payroll tax return is due on November 1, 2021, in the form of an information release. The Internal Revenue Service strongly recommends that employers file their tax forms online.
In addition, the Internal Revenue Service notes that the credit for wages earned during qualifying periods of sick leave and family leave has been extended and modified. Employer tax credits for qualified sick and family leave wages enable companies with fewer than 500 employees to provide their employees with paid leave, which can be used for the employee’s own health needs or for the care of family members. These credits are available to businesses that meet certain requirements.
The American Recovery and Reinvestment Act of 2021 (ARRA) made additional changes and extended the tax credits for paid sick leave and family leave, as well as increased the possibility of advance payments of the tax credits. The advice may be found in Notice 2021-24, 2021-18 IRB, and it pertains to the authority to lower deposits and obtain advances for credits for periods of absence that extend until September 30, 2021. See IRS grants further relief from failing to deposit penalty.
Additionally, the employee retention credit (ERC) has been extended and updated with new provisions. The Employment Retention Credit (ERC) is a refundable tax credit that may be used to reduce certain employment taxes. The credit is equal to fifty percent of the qualified wages that an eligible employer pays to employees.
The modified and extended credit is available for eligible wages paid prior to January 1, 2022, provided that they are paid before that date. In most respects, the regulations governing the ERC for the second quarter of 2021, the third quarter of 2021, and the fourth quarter of 2021 are basically equivalent to one another. Visit IRS gives thorough guidelines on employee retention credit for additional information on the ERC.