Employee Retention Credit Guidance for 2021 3rd and 4th Quarters

01 Sep 2021 Employee Retention Credit Guidance for 2021 3rd and 4th Quarters

Authored by: W. Dale Westenskow, CPA and Greg Ward, CPA

The IRS has recently released guidance to address changes made by the American Rescue Plan Act of 2021 for wages paid after June 30, 2021, and before January 1, 2022.

RECOVERY STARTUP BUSINESSES

The maximum amount of the Employee Retention Credit for 2021 is 70% of qualified wages (including allocable qualified health plan expenses), limited to $10,000 per employee per calendar quarter. Thus, the maximum credit is $7,000 per employee for each calendar quarter of 2021. However, there is a separate credit limit that applies to “recovery startup businesses” during the third and fourth calendar quarters of 2021.

A recovery startup business is defined as an employer:

1. That began carrying on any trade or business after February 15, 2020,
2. For which the average annual gross receipts of the employer for the 3-taxable-year period ending with the tax year that precedes the calendar quarter for which the credit is determined does not exceed $1 million, and
3. That is not otherwise an eligible employer due to a full or partial suspension of operations or a decline in gross receipts.

The amount of the credit allowed for each of the third and fourth calendar quarters of 2021 for a recovery startup business cannot exceed $50,000.

A tax-exempt organization can also qualify for the Employee Retention Credit under the recovery startup business rules.

A recovery startup business is eligible to be a small employer.  Accordingly, in the third and fourth calendar quarters of 2021, a recovery startup business with 500 or less employees may treat all wages paid with respect to each employee during the quarter as qualified wages (including wages paid to employees who are still able to work during the quarter).

The determination of whether an employer is a recovery startup business is made separately for each calendar quarter. For example, consider an eligible employer that is a recovery startup business in the third quarter of 2021 but is not in the fourth quarter of 2021 (because it is an eligible employer due to a full or partial suspension or a decline in gross receipts during the fourth quarter of 2021). In this case, the $50,000 limitation applies to the third quarter of 2021, but not the fourth quarter of 2021.

FIRST OR SECOND DRAW PPP LOANS

The interaction between PPP loans and the Employee Retention Credit continue to apply in the third and fourth calendar quarters of 2021.

FULL-TIME EQUIVALENT EMPLOYEES

For purposes of identifying qualified wages, an employee’s status as a full-time employee is irrelevant. Wages paid to an employee who is not full-time may be treated as qualified wages if all other requirements to treat the amounts as qualified wages are satisfied.

TIPS

Cash tips received by an employee in any calendar month are not considered qualified wages, unless such cash tips are $20 or more (same rules for purposes of determining whether tips are considered wages for employment tax purposes).

TIMING OF QUALIFIED WAGES DEDUCTION DISALLOWANCE

The employer’s deduction for qualified wages, including qualified health plan expenses, is reduced by the amount of the Employee Retention Credit.

Under the CARES Act, an employer that received a PPP loan was not eligible for the Employee Retention Credit. The Consolidated Appropriations Act, 2021, repealed this prohibition, effective retroactive as if it was never included in the CARES Act. Thus, under the new law, an employer that received a PPP loan may claim the Employee Retention Credit for any qualified wages paid to employees if the employer is an eligible employer that meets the requirements for the credit. However, qualified wages for which the employer claims the Employee Retention Credit are excluded from payroll costs paid during the covered period that qualify for forgiveness under the PPP.

The retroactive repeal of this rule was enacted into law at the end of 2020. Some employers may have filed an adjusted employment tax return in the interim to claim the Employee Retention Credit for prior calendar quarters. This filing would have come after already filing a federal income tax return for the tax year in which the credit is to be claimed on the adjusted return. A reduction in the amount of the deduction allowed for qualified wages due to claiming the credit occurs for the tax year in which the qualified wages were paid or incurred. When a taxpayer claims the Employee Retention Credit because of this retroactive tax law change, the taxpayer should file an amended federal income tax return (or administrative adjustment request if applicable) for the tax year in which the qualified wages were paid or incurred to correct any overstated deduction taken with respect to those same wages reported on the original federal tax return.

RELATED INDIVIDUALS

In general, wages paid to certain related individuals are not taken into account for purposes of determining qualified wages for the Employee Retention Credit.

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