The IRS released additional guidance (Notice 2021-49) for the employee retention credit (ERC) on August 4th, 2021 that amplifies previous guidance issued in Notice 2021-20 and Notice 2021-23. Notice 2021-49 also clarifies some areas for both 2020 & 2021 and it also provides guidance for Q3 & Q4 2021.
Q3 & Q4 2021- RECOVERY STARTUP BUSINESS REMINDER
Did you start a business after February 15, 2020? If so, you may now be able to take advantage of the ERC! Previously the ERC was only available to businesses that were formed prior to February 15, 2020. However, when the American Rescue Plan Act of 2021 (ARPA) was passed on March 11, 2021 eligibility opened up to new businesses for the second half of the year. If your business had less than $1 million in annual average gross receipts and started after February 15, 2020 you are a Recovery Startup Business. This makes you eligible for the ERC for Q3 & Q4 2021 without needing to show a reduction in gross receipts or a governmental suspension. Wages are still capped at $10,000 per employee, and you receive 70% back via the ERC; however, Recovery Startup Businesses only qualify for up to $50,000 per quarter. Keep in mind that aggregation rules still apply.
In addition, Q3 & Q4 2021 has new eligibility for Severely Financially Distressed Employers. For employers whose gross receipts declined 90% or more from the corresponding quarter in 2019, all wages in Q3 & Q4 2021 may be treated as qualified wages for the ERC (regardless of the employer size).
CLARIFICATIONS FROM NOTICE 2021-49
THE GOOD
TIPS AS WAGES
The Notice clarifies that reported cash tips in the amount of $20 or more are considered qualified wages for the ERC. Further, employers can claim the tip credit on the same wages.
FULL TIME EQUIVALENT EMPLOYEES
When determining if you are a large employer or small employer, you aren’t required to consider a full-time equivalent in your full-time count. The IRS reiterated that for the purposes of the ERC a full-time employee is an employee who, in any calendar month in 2019, had an average of at least 30 hours per week or 130 hours in the month.
THE BAD
TREATMENT OF 2020 ERC CREDITS AND AMENDED 941 RETURNS
Notice 2021-49 states that if you amended a 2020 payroll tax return (941X) to claim the ERC, that reduction of payroll expenses must be taken into consideration on the 2020 income tax return. This may require amendments to 2020 income tax returns.
THE UGLY
MAJORITY SHAREHOLDER’S AND SPOUSAL WAGES
Long anticipated clarification was released regarding majority shareholders’ wages and their eligibility for the ERC. Ultimately, through wide reaching attribution rules, if a majority shareholder has any living relative (blood or marriage), regardless of that living relative’s employment status, the majority shareholder’s wages aren’t eligible for the ERC. While these attribution rules are a bit bizarre, Notice 2021-49 provides many examples that clearly show this is the final intent on this issue.
Have questions about the ERC? Let Reese Henry & Company, Inc. assist you as you navigate this highly advantageous credit! See our previous blog post that discusses eligibility requirements and the background of the ERC, and reach out to a qualified professional to assist you in getting the credit you are eligible for!