The IRS has released additional guidance on the Employee Retention Credit (ERC) through Notice 2021-49, issued August 4th, and Revenue Procedure 2021-33, issued August 10th. Here are the highlights from the Notice and Revenue Procedure.
For purposes of the ERC, a qualified employer is eligible if it experiences a significant decline in gross receipts or experiences a full or partial suspension of business due to a government order. The amount of the ERC is a percentage of “qualified wages” (including qualified health plan expenses) paid per employee during an applicable quarter or suspension period.
“Small employers” may calculate the amount of their ERC based on all qualified wages paid during the applicable quarter or suspension period, while a “large employer” can only determine the amount of its ERC based on Qualified Wages paid to employees not providing services, such as furloughed employees.
Employers Not in Existence in 2019
The Notice confirms that employers who were not in existence in 2019 may use the average number of full-time employees for calendar year 2020 in determining their status as a large employer or small employer.
In determining whether the employer experienced a “significant decline” in gross receipts, an employer who did not exist in 2019 may use calendar year 2020’s gross receipts.
Employers must determine whether they are classified as a small employer or large employer based on the number of full-time employees they had in 2019 (or 2020 if the employer was not in existence in 2019).
The Notice clarifies that this test is not based on the number of “full-time equivalent employees,” the standard for the Affordable Care Act, but rather “full-time employees.” For ERC purposes, “full-time employees” are those who work an average of 130 or more hours a month or work an average of 30 hours or more per week.
The Notice clarifies that employers cannot use the same wages of an employee for both the Employee Retention Credit and as payroll costs for the following programs:
- Paycheck Protection Program forgiveness
- Shuttered Venue Operators Grants (for the third and fourth quarters of 2021)
- Restaurant Revitalization Fund Grants (for the third and fourth quarters of 2021)
Employers must collect and retain documentation showing which wages are being used for the ERC versus other programs.
Note: Employers are allowed to claim both the Employee Retention Credit and tip credit under IRC Section 45B.
Qualified Wages for Relatives
Notice 2021-49 states that the wages paid to employees with the following relationships to a majority owner of a corporation, partnership, or other entity are not qualified wages:
- A child or a descendant of a child
- A brother, sister, stepbrother, or stepsister
- The father or mother, or an ancestor of either
- A stepfather or stepmother
- A niece or nephew
- An aunt or uncle
- A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
- An individual (other than a spouse, determined without regard to section 7703, of the taxpayer) 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
Businesses Acquired in 2021
The Notice states that an employer who acquired a business in 2020 may include the acquired business’s 2019 gross receipts as part of the employer’s gross receipts to determine if they experienced a “significant decline” in gross receipts for 2019.
Revenue Procedure 2021-33
Prior to Revenue Procedure 2021-33, employers had to include their Paycheck Protection Program loan forgiveness amounts and any other pandemic relief program grant amounts in their gross receipts for the quarter in which the loan was forgiven to determine whether they experienced a “significant decline” in gross receipts.
Revenue Procedure 2021-33 allows employers to exclude the following amounts from their gross receipts for the purposes of the significant decline in gross receipts test:
- Paycheck Protection Program loan forgiven amounts
- Restaurant Revitalization Fund grant amounts
- Shuttered Venue Operators Grant amounts
Stay Tuned for Further Guidance on the Employee Retention Credit
It’s important to note the Bipartisan Infrastructure Investment and Jobs Act would end the Employee Retention Credit early and not allow employers to claim the ERC for the 4th quarter of 2021 if enacted as currently proposed. Stay tuned for updates.