Updates to the Employee Retention Credit (ERC 2021)

Employee Retention

August 23, 2021

How would President Biden’s infrastructure bill affect the Employee Retention Credit (ERC)?

What is known is that if the bill is passed in the House and signed by President Biden, the Employee Retention Credit (ERC) will be ending sooner than expected. 

The ERC for 2021 is a payroll tax credit up to 70% of qualified wages paid to employees.  The ERC credit is taken against the employer share of the Social Security Tax and any amount in excess that was to be claimed as a refundable portion.  For the 3rd quarter of 2021, the credit would instead be taken against the employer share of the Medicare Tax.  To help fund the infrastructure bill, the government would decide to end this payroll tax after the 3rd quarter of 2021.

Qualifications of the ERC were adjusted in the beginning of 2021, which opened more opportunities for employers to take advantage of the ERC.  If your business was not shut down due to government order in 2021, all you had to do was show a 20% reduction in gross receipts compared to the same quarter in 2019.

What if you filed your federal income tax return before you claimed the ERC?

In the new IRS notice 2021-49, the IRS says that for those employers who claimed ERC wages for 2020 retroactively, the employer must file an amended return.  On the amended return, wages claimed on the original tax return will have to be reduced by the amount of ERC claimed during 2020.

How Are TIPS Treated?

The IRS has been receiving many inquiries regarding how tips should be treated as qualified wages.  We now know if an employee received cash tip in excess of $20 in one month that amount is allowed to be treated as qualified wages for purposes of the ERC. 

Also confirmed in the notice are tips that were claimed for purposes of the ERC. These can be claimed as well for the Section 45B Tip Credit.  This credit is available to employers that operate food and beverage businesses that equal the portion of employer social security taxes paid on cash tips.

The Treatment of Related Individuals

If the eligible employer owns more than 50% of the value of a corporation or more than 50% of a company’s outstanding stock, they may not have their wages taken into account for purposes of the ERC.  The following relationships to a more than 50% owner of a company do not qualify the wages for the ERC per IRS notice 2021-49:

(A) A child or a descendant of a child.

(B) A brother, sister, stepbrother, or stepsister.

(C) The father or mother, or an ancestor of either.

(D) A stepfather or stepmother.

(E) A niece or nephew.

(F) An aunt or uncle.

(G) A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

(H) An individual who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household.

We still have not received much guidance from the IRS on if the wages of a spouse of the majority owner would be disallowed.

UPDATE – August 27, 2021

This past Tuesday, the House passed the $3.5 trillion budget framework of the infrastructure bill, which advances the bill towards another vote to officially pass and get signed into law. Speaker of the House Nancy Pelosi said that she is committing to getting the bill passed by September 27.

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