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).
Source: Accounting Today & Journal of Accountancy