The Internal Revenue Service (IRS) has provided guidance to clarify uncertainties related to the Employee Retention Credit (ERC), which was originally set to expire on Jan. 1, 2022, but was later amended to apply only to wages paid prior to Oct. 1, 2021, except in the case of recovery start-up business employers. Taxpayers and their accountants had been waiting for answers to several questions related to ERC eligibility requirements and credit calculations, including how to handle gross receipts with respect to Payroll Protection Program (PPP) forgiveness or other COVID-19 related grants, as well as a range of other items, on their 2020 and 2021 payroll tax returns. The IRS issued Revenue Procedure 2021-33 and Notice 2021-49 to address these concerns. Below is a summary highlighting important points noted in the documents.
Notice 2021-49 clarified that tips received by employees are considered “qualified wages.” As such, employers can claim both an ERC and a FICA tip credit for the same tip monies. The notice also stipulated that wages paid to any person in the family of a more-than-50% owner, including the owner, can’t be included in the ERC.
Another question answered by the notice was related to income taxes. The notice explains that employers who deducted wages that were also used when calculating their ERC must adjust income in the actual year the wages were paid (rather than the year the law went into effect or the year the claim was filed, if different). Businesses will need to file amended federal tax returns to apply any income adjustments to the correct year.
Recovery Start-Ups and Severely Distressed Employers
In the third and fourth quarters of 2021, recovery start-up businesses became eligible for the ERC. Their credit is limited to $50,000 per quarter. During this same time frame, some companies may qualify as “severely distressed employers,” defined as having suffered a 90% drop in gross receipts when compared against 2019’s gross receipts. Severely distressed businesses may consider all employee wages paid that quarter as qualified wages when they calculate their ERC.
Gross Receipts in the ERC Calculation
Until recently, taxpayers didn’t know if government funding related to COVID-19 should be considered part of gross receipts when calculating whether they had a significant decline in gross receipts, which directly impacts ERC eligibility. Revenue Procedure 2021-33 established safe harbor, giving taxpayers the ability to exclude certain COVID-19 funds from the calculation of “gross receipts,” which expanded eligibility. These funds include:
- Forgiveness Portion of a Paycheck Protection Program (PPP) Loan
- Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act
- Restaurant Revitalization Grants under the American Rescue Plan Act of 2021
However, it’s important to note that COVID-19 funding is still included when calculating gross receipts for all other tax purposes. And it should be assumed that grants or loan forgiveness from programs outside of the three noted above will also continue to count as gross receipts for the ERC.
Please contact your HW&Co. advisor if you would like to discuss how the IRS’s guidance affects your ERC calculations and tax return filing.