Eligible Businesses Can File Retroactive Claims for Wages Paid in Prior Tax Quarters
On Aug. 4, the IRS issued further guidance on the employee retention credit, including guidance for employers who pay qualified wages after June 30, 2021, and before Jan. 1, 2022, and issues that apply to the employee retention credit in both 2020 and 2021.
New changes for Q3 and Q4
The new guidance addresses changes made by the American Rescue Plan Act (ARPA) to the employee retention credit that are applicable to the third and fourth quarters of 2021. Those changes include, among other things:
- Making the credit available to eligible employers that pay qualified wages after June 30, 2021, and before Jan. 1, 2022
- Expanding the definition of eligible employer to include “recovery startup businesses”
- Modifying the definition of qualified wages for “severely financially distressed employers”
- Providing that the employee retention credit does not apply to qualified wages taken into account as payroll costs in connection with 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.
Notice 2021-49 also responds to various questions that the Treasury Department and the IRS have been asked about the employee retention credit 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.
Although the Employee Retention Tax Credit (ERTC) is expiring at the end of 2021, there’s still time for eligible businesses to claim the credit, if they haven’t already. Eligible employers can take advantage of the employee retention credit against applicable employment taxes and qualified wages paid to their employees through Dec. 31, 2021. Although the program is set to end at the end of 2021, the credit can be claimed on amended payroll tax returns as long as the statute of limitations remains open, which is three years from the date of filing.
The ERTC, also referred to as the Employee Retention Credit (ERC), was created by the Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law in March 2020, to encourage businesses to keep employees on their payroll. The Consolidated Appropriations Act, 2021 (CAA), enacted in December 2020, and the American Rescue Plan Act (ARPA), enacted in March 2021, amended and extended the credit and the availability of certain advance payments of the credits through the end of 2021.
The ARPA, for instance, allows small employers that received a Paycheck Protection Program (PPP) loan to also claim the ERTC.
For 2021, an employer can receive 70 percent of the first $10,000 of qualified wages paid per employee in each qualifying quarter, raised from 50 percent in 2020. The credit applies to wages paid or incurred from March 13, 2020 through Dec. 31, 2021. The cost of employer-paid health benefits can be considered part of employees’ qualified wages.
There is no size limit on eligibility for the ERTC. However, small and large businesses are treated differently:
- For employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shutdown order
- For employers with more than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to COVID-19-related circumstances
Eligible employers are private-sector businesses and tax-exempt organizations that experienced:
- A full or partial shutdown of operations as a result of a government order limiting commerce due to COVID-19 during 2020 or 2021
- A gross receipts decline of more than 50 percent during a 2020 or 2021 calendar quarter, when compared to the same quarter in the prior year
- A “recovery startup” business that was launched after Feb. 15, 2020, for which the average annual gross receipts do not exceed $1 million, subject to a quarterly ERTC cap of $50,000.
For the gross receipts test, a business must have experienced more than a 50 percent decline in 2020 (compared to the same quarterly period in 2019) to be eligible. For 2021, a business must have experienced more than a 20 percent decline in gross receipts, compared to the same quarterly period of 2019. New businesses not in existence during a particular quarter in 2019 are permitted to substitute the corresponding quarter of 2020 for the comparison.
If your business experienced a substantial decline in gross receipts, but has since recovered and you did not claim the credit, TAC can help you claim it. If this issue affects you – we will reach out to discuss.
The final dates for eligible businesses to claim the ERTC is with their quarterly Form 941 tax filings, due October 31 and December 31, 2021. Business tax filers will need additional payroll data and other paperwork to file for the ERTC with their quarterly returns.
TAC will be proactively reaching out to all clients who qualify for the ERTC over the next few weeks. Please do contact us about this specific issue – if you qualify, we will be in touch. If you do not qualify – then we will not be contacting you about this.