As more employers utilize the employee retention credit to keep their workers employed—and as the pandemic continues to be a factor in American business—the Internal Revenue Service continues to issue guidance on who qualifies for the credit and how best to apply it.
The latest round of guidance from the IRS includes clarification for employers who pay qualified wages after June 30, 2021, and before Jan. 1, 2022; as well as instructions on various issues that apply to the credit in 2020 and 2021.
The IRS also declared a safe harbor that allows employers to exclude certain items from gross receipts only for the purpose of determining their eligibility for the employee retention credit.
Changes were made to the employee retention credit by the American Rescue Plan Act of 2021 (also known as ARP), and are outlined in Notice 2021-49. These changes apply to the third and fourth quarters of 2021 and include:
- Making the credit available to eligible employers who pay qualified wages after June 30, 2021, and before Jan. 1, 2022.
- Expanding the definition of eligible employer to include recovery startup businesses.
- Modifying the definition of qualified wages for severely financially distressed employers.
- Providing that the employee retention credit does not apply to qualified wages considered as payroll costs in connection with a shuttered venue grant or a restaurant revitalization grant.
The IRS also uses Notice 2021-49 to answer various questions that have arisen about applying the employee retention credit for tax years 2020 and 2021.
These issues include:
- 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 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.
- Whether wages paid to majority owners and their spouses may be treated as qualified wages.
The safe harbor feature is set forth in Revenue Procedure 2021-33 and allows employers to exclude some amounts from gross receipts—but only for the purpose of determining whether they qualify for the employee retention credit.
Eligible items that may be excluded are the amount of the forgiveness of a Paycheck Protection Program (PPP) loan; Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act; and Restaurant Revitalization Grants under the American Rescue Plan Act of 2021.
Applying the safe harbor couldn’t be easier: the employer has only to exclude these amounts when calculating their quarterly eligibility for the credit on their employment tax return.
Employers who are eligible for the credit must report their total qualified wages and the related health insurance costs that go along with them on their employment tax returns. Usually, Form 941, Employer’s Quarterly Federal Tax Return is used.
If a reduction if the employer’s employment tax deposits isn’t enough to cover the credit, the employer can file Form 7200, Advance Payment of Employer Credits Due to COVID-19, to qualify for an advance payment from the IRS.
For more information on the Employee Retention Credit, see these resources from the Internal Revenue Service:
Source: COVID Tax Tip 2021-123