Special Alert: IRS Offers Further Guidance
on Employee Retention Tax Credit

Marty McCarthy, CPA, CCIFP
Focused on You. Dedicated to Your Success.
August 6, 2021

The IRS and the Treasury Department released guidance Wednesday on the employee retention tax credit (ERTC). It includes advice for eligible employers who pay qualified wages after June 30, 2021, and before January 1, 2022. As reported earlier this week, Congress is considering a proposal to end the tax break on September 30 to help pay for the proposed bipartisan infrastructure plan.
 
ERTC equals 70% of qualified wages (including allocable qualified health plan expenses), and the amount of qualified wages (including allocable qualified health plan expenses) taken into account with respect to any employee is limited to $10,000 for any calendar quarter, for a maximum credit of $7,000 per employee for each of the first and second calendar quarter of 2021.
 
Notice 2021-49 addresses how various issues apply to the ERTC in both 2020 and 2021. The notice explains changes made by the American Rescue Plan Act (ARPA) of 2021 to ERTC that are applicable to the third and fourth quarters of 2021, including:
  • Making the credit available to eligible employers that pay qualified wages after June 30, 2021, and before January 1, 2022.
  • Expanding the definition of eligible employer to include recovery startup businesses (businesses that began carrying on a trade or business after February 15, 2020, had less than $1 million in annual gross receipts and meet several other conditions). An eligible employer that is a recovery startup business, the amount of the credit allowed for each of the third and fourth calendar quarters of 2021 cannot exceed $50,000.
  • Modifying the definition of qualified wages for severely financially distressed employers.
  • Providing that the ERTC does not apply to qualified wages considered as payroll costs in connection with a shuttered venue grant (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 ARPA).
 
Guidance is also provided on various issues pertaining to the ERTC for both 2020 and 2021, 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.
  • Whether wages paid to majority owners and their spouses may be treated as qualified wages.
 
One change under the ARPA rules is that, for the third and fourth quarters of 2021, eligible employers claim the credit against the employer’s share of Medicare tax (or equivalent portion of Tier 1 tax under the Railroad Retirement Tax Act) rather than, as previously, against the employer’s share of Social Security tax (or its equivalent Railroad Retirement Tax Act portion).
 
Eligible employers can report their total qualified wages and the related health insurance costs for each quarter on a Form 941, Employers Quarterly Federal Tax Return for the period in question. Certain employers can get an advance payment from the IRS if a reduction in their employment tax deposits does not cover the tax credit by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
 
Frequently asked questions and updates on the employee retention credittax credits for required paid leave and other items can be found on the coronavirus page of IRS.gov.

Source: Accounting Today & Journal of Accountancy
Marty’s Thoughts
Employers that received a Paycheck Protection Program (PPP) loan may also qualify for an ERTC. As noted earlier in the week, for 2021, the potential credit can be up to $28,000 per employee. I highly encourage businesses that have not yet taken advantage of ERTC to do so soon. We have been able to save clients a lot of money by using ERTC. Feel free to call me to learn more.
Feel free to contact any member of our team at (610) 828-1900 (PA) or (732) 341-3893 (NJ) with questions. Rich Higgins, CPA, managing principal – New Jersey office can be contacted at Richard.Higgins@McCarthy.CPA. I can be reached at Marty.McCarthy@McCarthy.CPA. As always, we are happy to help.

Stay safe,

Marty McCarthy, CPA, CCIFP
Managing Partner
McCarthy & Company

Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).