Employee Retention Credit: Further Guidance

In COVID Tax Tip 2021-123, the IRS clarifies some of the confusion surrounding the powerful but complex Employee Retention Credit. The IRS is addressing changes made by the American Rescue Plan Act of 2021 that apply to the third and fourth quarters of 2021.

These changes include:

• 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 considered as payroll costs in connection with a shuttered venue grant or a restaurant revitalization grant.

For business managers who had questions and needed authoritative answers, the IRS is answering various questions about the credit for tax years 2020 and 2021, including:

• The definition of a full-time employee and whether that definition includes full-time equivalents.
• The treatment of tips as qualified wages, and the interaction with the credit for the portion of employer Social Security taxes paid with respect to employee cash tips.
• The timing of the qualified wages deduction disallowance and whether taxpayers who 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.

Reporting clarifications

Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their employment tax returns, generally, Form 941 Employer's Quarterly Federal Tax Return, for the applicable period. If a reduction in the employer's employment tax deposits is not sufficient to cover the credit, certain employers may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

This is just a summary of a series of detailed and technical provisions. The IRS has provided all the details in Notice 2021-49. Managers should consult with a qualified tax professional to make sure they get all the benefits they're entitled to without inadvertently violating the provisions.