New 2021 Employee Retention Credit Guidance Released

Since the closure of the Paycheck Protection Program (PPP), Restaurant Revitalization Fund, and other Small Business Administration (SBA) COVID-19 relief programs, New Jersey and Pennsylvania-area businesses have been searching for funding alternatives. Over the past few months, the Employee Retention Credit (ERC), a payroll-based tax credit, has moved to the forefront. The ERC provides an immediate savings opportunity to businesses that experienced a decline in gross receipts in either 2020, 2021, or both.

However, because the ERC was originally extended to June 30, 2021, and later through the end of the year, the IRS had not issued guidance on claiming the credit after July 1, 2021.  Finally, on August 4, 2021, the IRS issued Notice 2021-49 providing the long-awaited details and other information, summarized below.

Full-Time Equivalents
Several questions have been posted to the IRS about whether full-time equivalents (FTEs) need to be included when determining whether a company is a large or small employer. In addition, there were also questions about whether wages paid to part-time employees should be treated as qualified wages, assuming all other requirements have been met. The new guidance asserts that FTEs are not to be included by a business when determining whether the employer is large or small. For purposes of qualified wages, the employee status is irrelevant, and wages paid to non-full-time employees can be treated as qualified wages assuming all other requirements have been met.

Tips as Qualified Wages

There have also been several questions presented about whether tips should be included as part of qualified wages. According to the guidance, tips paid in any medium other than cash and cash tips less than $20 should not be included. However, suppose cash tips received by an employee in a calendar month amount to $20 or more. In that case, all tips received by an employee in that month should be included in the wage calculation (assuming all other requirements are satisfied).

Section 45B Tax Credit

Concern has surfaced as to whether employers that claim the ERC may also claim the Employer Tax Credit for FICA Paid on Tip Income. Under new regulations, the IRS confirms that a qualifying employer may take both the ERC and the Section 45B tax credit for the same wages.

Alterative Quarter Election

Under changes made for the ERC in 2021, a business could use an alternative quarter to demonstrate a decline in gross receipts. However, there has been concern whether a company would be required to continue using the Alternative Quarter Election if it had been previously used. The IRS makes clear there is no requirement to continue using this election.

Related Individuals

Since many small businesses rely on owners and their family members to work in the business, there have been questions about whether these wages should be included in the qualified wage calculation. According to the guidance, wages paid to children, siblings, parents, stepparents, niece/nephew, aunt/uncle, or those with the same principal address should be excluded from the calculation. The wages paid to a spouse are slightly more complicated because it is necessary to determine if constructive ownership exists.

Constructive ownership means that someone is so closely related to an owner that the IRS treats them as if they were the owner for tax purposes. The following considerations should be made when determining whether constructive ownerships exist, including:

• Stock owned by or for a corporation, partnership, estate, or trust, is considered as being owned proportionately by its shareholders, partners, or beneficiaries.
• An individual is considered to own the stock owned, directly or indirectly, by the individual’s family.
• An individual owning any stock in a corporation is considered to own the stock owned by or for his partner.
• Family members, including brothers or sisters, a spouse, and ancestors (other than mentioned in bullet point #2)
• Stock will be treated as being constructively owned by a person, as outlined in the first three bullet points as actually owning the stock. Stock constructively owned by an individual because of bullet point #2 or bullet point #3 will not be treated as owned by the individual.

There are certain complex situations under which spousal wages could be included.

The information provided in the new guidance means additional savings opportunities for qualifying New Jersey and Pennsylvania-area businesses in the 3rd and 4th quarters. However, given the complexity of the changes, it is important to consult with a qualified advisor to guide you through the process.

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If you have questions about the material outlined above or need assistance claiming the ERC, Klatzkin can help. For additional information, click here, and a representative will be in touch shortly. We look forward to speaking with you soon.

©2021 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date. The content is provided for informational purposes only and does not constitute accounting, tax, or financial advice. Please consult your advisor concerning your specific situation.