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Tax Tips and IRS Guidance for Employers Claiming the Employee Retention Credit

October 11, 2021

The Employee Retention Credit was a landmark bill that passed in the US during the pandemic. With a 50% refundable tax credit for businesses on wages, it was an important act to pass. But since it passed, there have been a number of revisions and alterations. The latest ones happen to be revenue procedure 2021-33 and Notice 2021-49. Both address a multitude of questions that employers have had for a long time. Here are the main changes.

Adding Other Benefits in Your Gross Receipts

A serious point of contention that employers were facing was gross receipts and adding benefits to them. Companies were wondering for a long time whether they had to include other government aid or forgiveness on their loan into their gross receipts. However, the ambiguity surrounding this is now over.

According to Rev. Proc. 2021-33, an employer no longer has to add the benefits that they have taken each quarter. By skipping them, Congress will no longer worry about double counting in some cases. Furthermore, the entries that they can forgo include forgiveness on any PPP loans, revitalization grants, or shuttered venue grants.

Filing Amended Returns

Another major change that came to Employee Retention Credit was in the form of filing amended returns. Now when employers claim Employee Retention, they will have to reduce the amount that they receive from their employee wages’ deductibles.

Some employers were also sending their 941-X forms later than their intended time, which was causing concern. However, Notice 2021-49 clarified that employers should file their amended income tax form in the year that they incurred the qualified wages. So if an employer files a 2020 941-X form in 2021, they will have to submit an amended business tax return from 2020 to show the reduced deductions.

Clarification of Related Individual Rules

Notice 2021-49 also went on to clarify how related individual rules would apply to owners of a business. More specifically, it clarified whether the wages an owner receives would qualify for the credit. The new notice mentions that “Related Individuals” do not qualify for the ERC. The IRC Section 5 (i) defines related individuals as an owner of an entity who has a brother, sister, any other blood relative, or even a descendent of their lineage. The owner’s spouse can even be a related individual; therefore, their wages will not qualify for employee retention credit.

Full-Time Equivalents Vs. Full-Time Employments

Before the current notice, employers did not know if they should consider full-time equivalents when trying to determine their size. The size of a company plays a major role in the ERC and the tax-deductible that they will be able to receive. Fortunately, Notice 2021-49 makes it abundantly clear that employers do not have to add full-time equivalents when they try to determine the average number of employees. In fact, as long as an employee matches all of the other requirements for the ERC, it does not matter that they are full-time employees.

Applicable Taxes

Employers can even claim the ERC against their Medicare Tax’s share. If they do not have that option, they can claim it against the Railroad Retirement Tax Act’s Tier 1 tax that your company may receive. Of course, employers will only be able to receive the entitled amount once they have reduced other credits. The qualified family leaves wages and the qualified sick leave wages credits under ARPA will have to be taken out first. Once you have accounted for this amount, the rest of your Medicare tax share will now be available.

Final Thoughts

The guidance that came in the form of Notice 2021-49 has allowed businesses to send more claims for ERC. A good example of this practice comes with employers for restaurants that did not include cash tips when applying for the ERC. And now, through amendment returns, they will be able to receive even more Employee Retention Credits that they initially missed out on.

With the new guidelines, employers will not be able to focus on supporting and refining their business. And even though there are still things that are missing from the ERC provisions, it is still evolving. More and more employees will continue to work, even if the company itself is struggling. 

For tips and information regarding retirement plans, contact us.

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About The Author

Lyle Solomon is a licensed attorney in California. He has been affiliated with law firms in California, Nevada, and Arizona since 1991. As the principal attorney of Oak View Law Group, he gives advice and writes articles to help people solve their debt problems. You can connect with him on LinkedIn or tweet him on Twitter.

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