The IRS issued Notice 2021-49 last week. The notice provides guidance on the Employee Retention Credit (ERC) for wages paid from July 1, 2021 through December 31, 2021 and amplifies two previous notices by providing guidance on various issues that apply to ERC in 2020 and 2021.
Following are the highlights of the notice:
- Rules outlined in previous IRS notices will continue to apply to the third and fourth quarters of 2021
- Recovery startup businesses are eligible for the ERC during the third and fourth quarters of 2021. These businesses began operations after February 15, 2020 and have average annual gross receipts of $1 million or less. The notice also applies a separate ERC limit of $50,000 per quarter to recovery startups.
- Beginning in the third quarter of 2021, the credit is claimed against the employer’s share of Medicare tax. Prior to this, the credit was claimed against the employer’s share of Social Security taxes.
- Qualified wages for the ERC do not include qualified wages included in a restaurant revitalization grant or shuttered venue grant.
- Cash tips greater than $20 per month are qualified wages for the ERC. The notice also provides that these tips remain eligible for the income tax credit under section 45B of the Code; this credit is based on the FICA tax an employer pays on employees’ tip wages.
- Deductible wages for income tax purposes are reduced in the year in which they qualify for the ERC not when proceeds of the credit are received; this may require amended filings if 2020 tax returns were filed.
- Wages paid to majority owners and their spouses may qualify for the ERC but are subject to ownership attribution rules that may limit eligibility.
- The notice also clarifies the definition of full-time employees for purposes of the ERC and the alternative quarter election in determining reductions in gross receipts.
As with other COVID-19 programs, these are complex calculations and further interpretation of these provisions, as well as additional guidance, is expected. We invite you to contact us if you have questions or concerns.
Cullari Carrico LLC remains committed to assisting our clients, friends and communities during these uncertain times and has a dedicated team in place that can assist with any questions you have related to COVID-19 relief programs.