In the recently issued Notice 2021-49 (August 4, 2021), the IRS provides guidance for employers claiming the Employee Retention Credit (ERC).
Included in the IRS notice is guidance on the definition of related parties’ wages for purposes of claiming the ERC and whether the wages paid to shareholders and their spouses qualify for the credit. The notice clarifies that wages paid to a majority owner (one who directly or indirectly owns more than 50% of the entity), are not eligible for the credit. Wages paid to employees related to the majority owner are also disallowed for the credit (child or descendant of a child; brother, sister or steps; father, mother (including steps) or ancestor; niece or nephew, aunt or uncle, and in-laws).
Additionally, the notice answers a frequently asked question regarding the timing of the deduction for the wages paid which gave rise to the credit. Previous guidance for the ERC provided that an employer’s deduction for wages must be reduced for the employee retention credit. This new guidance solidifies that the timing of the reduction in wages is the year in which the wages were paid and not when the paperwork for the credit is filed and/or when the refund is actually received. Amended returns may need to be filed if credits were taken for 2020 wages and the related deduction was not reduced accordingly.
In related ERC news, the Treasury issued Revenue Procedure 2021-33 on August 10, 2021 related to the uncertainty as to how to determine gross receipts for the ERC. The guidance provides for a safe harbor, solely for ERC eligibility, that excludes certain COVID-related aid from gross receipts calculations to determine the quarterly decline in revenues, creating more certainty for employers determining if they qualify for the ERC. Excluded amounts include Paycheck Protection Program (PPP) forgiveness, Shuttered Venue Operator Grants and Restaurant Revitalization Grants.
Background
The ERC, established under the Cares Act in 2020, encourages employers to keep employees on the payroll while experiencing financial difficulties or shut-downs. To qualify for 2020, a company would need to have a decline of 50% in quarterly gross receipts compared to the prior year’s quarter (for example, compare 3rd quarter 2020 to 3rd quarter 2019). To qualify for 2021, a company would need to have a 20% decrease in gross receipts compared to the same quarter in 2019 (for example, compare 3rd quarter 2021 to 3rd quarter 2019). Alternatively, for 2021 only, an election is available to look back at the immediately preceding quarter and compare that quarter to the corresponding quarter in 2019 for the requisite reduction in revenues (for example compare 2nd quarter 2021 to 2nd quarter 2019 for 3rd quarter 2021 eligibility). This alternative quarter election is available on a quarterly basis and is not required to be used each subsequent quarter.
When enacted in 2020, the credit was equal to 50% of qualifying employee wages and certain health insurance benefits up to a maximum of $10,000 paid during 2020 (max $5,000 credit). Starting in 2021, the credit is calculated at 70% of qualifying wages, capped at $10,000 ($7,000 credit), per quarter. Therefore, the maximum credit per employee during 2021 is $28,000! To illustrate, an eligible company with 20 qualifying employees each earning at least $10,000 per quarter, the employer’s ERC would be $560,000.
Although the rules differ for 2020 and 2021, to qualify for the credit, an employer must either (1) experience a full or partial suspension of operations due to COVID-19, or (2) have a quarterly decline in gross revenues over the same quarter in 2019. Rules related to “large” and “small” employers also differ between the two years. To qualify in 2020, large employers (defined as those with more than 100 average full-time employees in 2019), must pay employees to not work. Starting in 2021, the definition of large employer changed to include those with more than 500 employees. Employers with less than the 100 (for 2020) or 500 (for 2021) full time employees, can qualify for the ERC based on a decline in gross receipts only without consideration to whether employees were providing services during those times.
No double dipping is allowed – meaning wages used in claiming the ERC cannot also be used in calculating PPP loan forgiveness. Coordination with the Shuttered Venue Operations Grant and Restaurant Revitalization Fund grants is also required
Final Note
Although the ERC is currently available through December 31, 2021, the Bipartisan Infrastructure Investment and Jobs Act, if enacted as currently passed by the Senate, would eliminate the ERC after the third quarter of 2021, thus reducing the maximum credit per employee during 2021 to $21,000.
Reach out to our team at MWB with any question on the ERC!