September 28, 2021

IRS Issues New Employee Retention Credit Guidance Even While Senate Plans its Untimely End

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Since the CARES Act introduced the temporary Employee Retention Credit (ERC) as a pandemic relief measure for eligible employers, we have carefully followed the subsequent amendments and expansions of the ERC to ensure that already overwhelmed employers can come to us for a streamlined experience in making the most of this credit.¹

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Significantly, the ERC is not a loan or a grant—it is the Federal Government incentivizing employee retention by providing direct payments to an eligible employer based on the payments made to the retained employees. The amount at stake is considerable—up to $33,000 per employee when accounting for the maximum allowable amounts during 2020 and 2021:

2020: ERC can be claimed for 50% of qualified wages, up to $10,000 per employee paid between March 13 and December 31, 2020. Simply, the maximum ERC is $5,000 per employee.
2021: ERC can be claimed for 70% of qualified wages, up to $10,000 per employee paid per quarter of 2021. Simply, the maximum ERC is $28,000 per employee.

On August 4, 2021, the IRS released an advance version of Notice 2021-49 (the latest ERC guidance) specifically: (1) for employers that pay qualified wages after June 30, 2021, and before January 1, 2022, and (2) addressing miscellaneous items applicable to the ERC in both 2020 and 2021. First, key takeaways regarding the changes applicable to the third and fourth quarters of 2021,² include but are not limited to:

  • Making the credit available to those eligible employers paying qualified wages after June 30, 2021, and before January 1, 2022;
  • Expanding the “eligible employer” definition to include “recovery startup businesses;”
  • Modifying the “qualified wages” definition for “severely financially distressed employers;” and
  • Providing that the ERC in inapplicable to qualified wages accounted for 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 the American Rescue Plan Act of 2021.”³

Finally, some of the more noteworthy miscellaneous ERC items addressed in the Notice with respect to both 2020 and 2021, include:

  • Whether the full-time employee definition includes full-time equivalents;
  • A discussion regarding the treatment of tips as “qualified wages” and the role of the IRC §45B credit;
  • Qualified wages deduction disallowance timing, and whether taxpayers must amend an already filed income tax return after claiming the credit on an adjusted employment tax return; and
  • Whether “qualified wages” include those wages paid to majority owners and their spouses.⁴

Additionally, the IRS clarified in its August 4, 2021 news release that:

Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their employment tax returns (generally, Form 941) 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-19.⁵

Importantly, we should note that this new guidance arrives at a particularly uncertain time, because:

  • although the ERC is currently set to expire at the end of this year, the Senate passed legislation and the House is projected to pass legislation this week which would terminate the ERC on September 30, 2021—three months earlier than originally set to expire,⁶ and
  • if the Delta variant (or others) presents renewed hardships on businesses, those companies that didn’t qualify for the ERC in the past two quarters of 2021 may desperately need ERC access in the final quarter of 2021.

We urge our readers to act quickly and contact their tax professional so that eligible employers do not miss out on much needed relief via the Employee Retention Credit. Contact our team at 410-497-5947 or fill out our brief contact form to schedule a confidential consultation.

Learn more about the Employee Retention Credits with Rebecca Sheppard and Matt Eddlemen on the latest episode of "A Way With Tax."

Footnotes

  1. Pub. L. No. 116-136, Div. A, §2301 (applicable to wages paid after March 12, 2020, and before Jan. 1, 2021) as amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, Pub. L. No. 116-260, Div. EE, §206 (applicable to wages paid after March 12, 2020, and before July 1, 2021) and §207 (applicable for calendar quarters beginning after Dec. 31, 2020, and before July 1, 2021; https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act; New Stimulus Modifies The Employee Retention Credit No Longer Precludes PPP Borrower From Claiming the Credit
  2. IR-2021-165, August 4, 2021.
  3. Pub. L. No. 117-2 (enacted March 11, 2021).
  4. IR-2021-165, August 4, 2021.
  5. Id.
  6. The House, however, will not consider the bill until the fall, because it is on recess until September 20.
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