The Employee Retention Credit is expiring at the end of 2021, so there is limited time remaining for companies to claim it if they haven’t already.
The IRS and Treasury Department recently issued a delayed guidance focusing on the extension and changes to the credit, known as the ERC. The guidance contained in Notice 2021-49 — which answers several important questions — applies to employers who pay qualified wages after June 30, 2021, and before Jan. 1, 2022. It also covers issues relevant to the ERC for both 2020 and 2021.
The notice addresses changes that were made under the American Rescue Plan Act (ARPA), including:
- The credit was made available to eligible employers that pay qualified wages after June 30, 2021, and before Jan. 1, 2022.
- The definition of eligible employer was expanded to include “recovery startup businesses.”
- The definition of qualified wages was modified for “severely financially distressed employers.”
- The measure provided that the ERC doesn’t apply to qualified wages that were considered payroll costs connected to 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 ARPA.
The notice provides the following answers to questions about the credit:
- Do full-time equivalents need to be counted when figuring out employer size? To this question, the IRS answered: “For purposes of determining whether an eligible employer is a large eligible employer or a small eligible employer, eligible employers are not required to include full-time equivalents when determining the average number of full-time employees.” However, that does not mean that wages paid to part-time employees cannot be considered qualified wages.
- May an employer receive the ERC and the section 45B tip credit for the same wages? The answer is yes.
- Does the wage deduction have to be reduced in the same year for which qualified ERC wages are paid? The answer here is yes. That means that if a taxpayer amends their payroll tax return to claim the ERC for quarters in 2020 and has previously filed their income tax return for 2020, they will also have to amend their income tax return due to the change in the wage deduction.
- May a business owner claim the ERC for wages the business paid to the owner themselves or to their spouse? The short answer to this question is no.