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IRS Shares New Updated Guidance on The Employee Retention Credit (ERC)

The IRS announced further guidance on the Employee Retention Credit (ERC) on August 4th, 2021. The updated information includes guidance for employers that pay qualified wages after June 30, 2021, and before January 1, 2022.

The Employee Retention Credit is a refundable tax credit against certain employment taxes on qualified wages that an eligible employer pays to employees after March 12, 2020, up to certain limitations. Established under the Coronavirus Aid, Relief and Economic Security (CARES) Act, the ERC was due to expire on December 31, 2020.

The new guidance in Notice 2021-49 is made up of two major sections. The first section focuses on changes made to the ERC for the third and fourth quarters of 2021, while the second section focuses on additional issues applicable to all versions of the ERC. Some of the overall key updates include:

Tips

When all other requirements are met, cash tips are treated as qualified wages for the ERC. This includes a limitation of $10,000 in wages per employee, per calendar quarter in 2021.

Section 45B Tip Tax Credit

Employers can claim both the ERC and the Section 45B Tip Tax Credit. This allows food and beverage establishments to claim a tax credit for Federal Insurance Contribution Act Taxes paid on any tips given to employees by customers through the tip tax credit. The IRS clarifies that there is no provision in the CARES Act or subsequent legislation that prevents the receipt of both credits for the same wages.

Wages paid to majority owners

Wages paid to individuals that have a controlling interest in the employer will not be eligible for the credit unless the controlling interest holder has no living relatives.

Definition of a full-time employee

When determining whether an applicant is a large or a small eligible employer, eligible employers do not need to include full-time equivalents while calculating the average number of full-time employees. However an employee’s status as full-time is irrelevant when identifying qualified wages. Non-full-time employee’s wages pass as qualified wages when all requirements are met.

Tax amendments

The ERC must be recorded in the tax year in which the wages were paid and reflected on the corresponding tax year for income tax purposes. Retroactive amendments to previous returns are necessary to meet this requirement. erc

The timing of the qualified wages deduction disallowance

Reductions in the amount of the deduction allowed for qualified wages caused by the receipt of the ERC will occur in the tax year in which the qualified wages were paid or incurred.

Recovery start-up businesses

Recovery start-up businesses are eligible for the ERC in the third and fourth quarters of 2021. They are employers that:

  • Began operations after February 15, 2020.
  • Have had average annual gross receipts of less than $1Million.
  • Is not an eligible employer due to a full or partial suspension of operations or a decline in gross receipts.

Additionally, a recovery start-up business is not eligible for more than a $50,000 credit in each eligible quarter.

These changes are important to note going forward and when looking back at 2020 records. Employers should speak with a trusted partner or advisor to go over any questions they may have.  Payroll Systems has dedicated a team to assist employers in maximizing their ERC credit and handling all the IRS paperwork.

Is there anything Payroll Systems can help you with as you accommodate rapid legislation changes? Reach out and talk to us about the easy-to-scale solutions you need for your business

 

 

 

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This article provides general information and shouldn’t be construed as legal or HR advice. Since employment laws may change over time and can vary by location and industry, please consult a lawyer or HR expert for advice specific to your business. You can also contact Payroll Systems to inquire about our HR support services.