The Internal Revenue Service and the Treasury Department released guidance Wednesday on the employee retention tax credit, including guidance for employers who pay qualified wages after June 30, 2021, and before Jan. 1, 2022, as Congress weighs a proposal to end the tax break next month to help pay for the bipartisan infrastructure plan.
The IRS and the Treasury guidance in Notice 2021-49 deals with how various issues apply to the employee retention credit in both 2020 and 2021, amplifying earlier guidance offered earlier this year in Notice 2021-20 and Notice 2021-23. The new notice explains changes made by the American Rescue Plan Act of 2021 to the employee retention credit that are applicable to the third and fourth quarters of 2021.
The employee retention credit was included last year as part of the CARES Act by offering tax credits to encourage more businesses to retain employees at the height of the COVID-19 pandemic in March 2020. However, the Paycheck Protection Program, with its promise of forgivable loans from the Small Business Administration, proved to be a more popular way for businesses to get help from the federal government. Initially, businesses couldn’t take advantage of both programs, but later legislation passed last December allowed them to use both the PPP and the ERC.
Some accountants have been helping their clients navigate the complexities of both programs. Jay Woods of Omega Accounting Solutions of Laguna Niguel, California, has been specializing in helping small business owners navigate the tax implications of the CARES Act and the employee retention credit, saving them up to $35,000 in taxes per employee.
“A lot of clients had no idea about the reality,” he said. “At the beginning of the pandemic, there were two paths — the PPP or this employee retention tax credit — and most people chose to deal with their banker because it was just easier than dealing with the IRS, and the money came quicker. [Later] they expanded it so that you could take both. At that point, I was talking to a lot of my CPA friends and colleagues to see if they were doing this for their clients, and the unequivocal answer was ‘No, we’re busy. It’s tax season.’ So I just looked at this and said, hey, there’s going to be a tremendous amount of people who need to look at this to see if they qualify. We have a big team, so we decided to go after it. Today we’ve recovered close to $9 million for clients, and filed about 80 of these so far. We’re picking up new clients every week, because there’s just not enough folks processing this credit versus the amount of people who potentially qualify.”
Under the American Rescue Plan Act, the employee retention credit was extended until the end of the year, but the bipartisan infrastructure bill that the Senate is taking up this week proposes to end the tax credit in September as a way to help pay for an estimated $8.2 billion of the $550 billion plan (see story). Lawmakers contend the program hasn’t been used by enough businesses to justify keeping it for the rest of the year.
Woods has found the IRS has been holding up many of the tax credit claims, however, due to the backlog at the resource-constrained agency. “The IRS has been a little slow in processing the refunds,” he said. “I think they’re backlogged right now. We’ve filed a bunch of these and some of them are 10 weeks out, and the IRS hasn’t processed the amended 941s and not processed the refunds. We’re still hopeful that they’re going to get caught up, but to date they’re a little backed up on their end.”
Form 941, the employer’s quarterly federal tax return, is one way to claim the credit. The IRS and the Treasury said they’re closely monitoring the pending legislation related to the employee retention credit and will provide additional information as needed.
The new notice issued by the IRS and the Treasury on Wednesday explains some of the recent changes from the American Rescue Plan Act. The changes include, among other items, (1) making the credit available to eligible employers that pay qualified wages after June 30, 2021, and before Jan. 1, 2022, (2) expanding the definition of eligible employer to include “recovery startup businesses,” (3) modifying the definition of qualified wages for “severely financially distressed employers,” and (4) 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 the ARP.
Recovery startup businesses are those that began carrying on a trade or business after Feb. 15, 2020, had less than $1 million in annual gross receipts and meet several other conditions.
Notice 2021-49 also offers guidance on a number of different issues pertaining to the employee retention credit for both 2020 and 2021. This guidance responds to various questions that the Treasury and the IRS have been asked about the employee retention credit, including:
- 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 section 45B credit;
- 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 majority shareholder provisions may turn out to be vexing for some family-owned companies. “The relatives will end up being attributed ownership from the qualifying owner, and then the actual owner will end up in that family member’s list of barred relationships,” wrote Ed Zollars, a partner at Thomas, Zollars & Lynch CPAs, on Becker Financial Education’s Current Federal Tax Developments blog. He noted that minority shareholders are not necessarily safe either, according to a footnote in the IRS notice, especially when the other shareholders are members of the same family.
Eligible employers can report their total qualified wages and the related health insurance costs for each quarter on a Form 941 for the period in question. If a reduction in the employer’s employment tax deposits isn’t enough to cover the tax credit, some employers can get an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Frequently asked questions and updates on the employee retention credit, tax credits for required paid leave and other items can be found on the coronavirus page of IRS.gov.