IRS Guidance on Employee Retention Credit

The Internal Revenue Service (IRS) and Treasury Department released additional guidance on the Employee Retention Tax Credit (ERC) and a safe harbor on gross receipts to help employers claiming the credit in the third and fourth calendar quarters of 2021.

This update dives into the guidance issued on August 4^th and provides information on the gross receipts safe harbor published August 10^th.  

Key Takeaways

Changes made to the ERC by the American Rescue Plan Act of 2021 (ARPA) and how they apply to the third and fourth quarters of 2021 are addressed in Notice 2021-49. This notice amplifies prior guidance issued in Notice 2021-20 and Notice 2021-23.

The changes made by the ARPA include the following:

• making the credit available to eligible employers that pay qualified wages after June 30, 2021 and before January 1, 2022,
• modifying the definition of eligible employers to include “recovery startup businesses” which are businesses that began operations after February 15, 2020 and meet several other conditions,
• updating the definition of qualified wages for “severely financially distressed employers,” and
• clarifying that the ERC does not apply to qualified wages considered as payroll costs related to Shuttered Venue Grants 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 ARPA.

The recent notice also provides guidance on other elements (in addition to the ARPA) of the ERC for both 2020 and 2021. According to the IRS website, this guidance aims to provide clarity on the ERC and provides updates on the following:

• The definition of a full-time employee and whether it includes full-time equivalents- Unlike the PPP, employers are not required to include full-time equivalents in their headcount for ERC purposes. However, wages paid to an employee who is not full-time can be included as qualified wages for the credit calculation.
• The treatment of tips as qualified wages and the interaction with the section 45B credit- Cash tips treated as taxable wages are treated as qualified wages for the ERC. Further, employers can take the FICA tips credit on the same wages.
• The timing of the qualified wages deduction disallowance, and whether taxpayers who already filed an income tax return must amend after claiming the credit on an adjusted employment tax return- The notice states that, if you’re amending 2020 941s to claim the ERC, you must also claim the reduced wage expense on your 2020 tax return. If you have already filed your 2020 return, you will have to amend to pick up the additional income.
• Whether wages paid to majority owners and their spouses are treated as qualified wages- The notice confirms section 267(c) attribution rules must be considered to determine ownership percentages.

Eligible employers may report total qualified wages and related health insurance costs for each quarter on their employment tax returns (i.e., Form 941) for the related period.

An Update on Safe Harbor for Gross Receipts

The IRS and Treasury Department issued a safe harbor allowing employers to exclude applicable items from their gross receipts to determine eligibility for the ERC.

Revenue Procedure 2021-23 states the safe harbor allows employers to exclude certain amounts from gross receipts to determine eligibility for the credit. The excludible items are:

• The amount of loan forgiveness from 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.

This update requires employers to exclude the amounts from their gross receipts for each calendar quarter since gross receipts are relevant to determining eligibility to claim the ERC. As a result, when claiming the credit, the employer must also apply the safe harbor to all employers treated as a single employer under the aggregation rules.

Revenue Procedure 2021-23 applies to wages paid after March 12, 2020 and before January 1, 2022.

The tax practice at Smith and Howard is closely following all proposed tax changes from the nation’s capital and will communicate updates as they are announced. If you have any questions and would like to contact a member of our tax practice, please complete this contact form.