New guidance from the Internal Revenue Service aims to help employers better understand the employee retention credit—and how they can qualify for it.
The new guidance spotlights employers who pay qualified wages after June 30 of this year and before Jan. 1 of 2022. Additional guidance tries to answer various miscellaneous questions around the credit in both the 2020 and 2021 tax years.
Why is the IRS issuing new employee retention credit guidance?
Additional instructions were needed after the American Rescue Plan Act of 2021 (ARP) made changes to the employee retention credit that apply to the third and fourth quarter of 2021.
This new guidance is contained in Notice 2021-49, which builds on guidance on the employee retention credit that was originally published in Notice 2021-20 and Notice 2021-23.
Some of the changes outlined in Notice 2021-49 include:
- Making the credit available to eligible employers who pay qualified wages after June 30, 2021, and before Jan. 1, 2022,
- Expanding the definition of eligible employer to include “recovery startup businesses,”
- Modifying the definition of qualified wages for “severely financially distressed employers,” and
- Providing that the employee retention credit does not apply to qualified wages taken into account as payroll costs in connection with a shuttered venue grant under section 324 of the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, or a restaurant revitalization grant under section 5003 of the ARP.
The Treasury Department also uses Notice 2021-49 to respond to various questions it has received about the employee retention credit. The IRS says these issues are addressed in the latest guidance:
- The definition of full-time employee and whether that definition includes full-time equivalents,
- The treatment of tips as qualified wages and the interaction with the section 45B credit,
- The timing of the qualified wages deduction disallowance and whether taxpayers that already filed an income tax return must amend that return after claiming the credit on an adjusted employment tax return, and
- Whether wages paid to majority owners and their spouses may be treated as qualified wages.
Those employers who qualify for the employee retention credit should report their total qualified wages and the related health insurance costs for each quarter on their employment tax returns for the period. Generally, this will be done using Form 941.
If a reduction in the employer’s employment tax deposits isn’t enough to cover the amount of the credit, some employers could get an advance payment from the IRS. Employers seeking the advance should file Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Both the Treasury Department and the IRS say they recognize that the employee retention credit is a changing landscape and are closely watching for new legislation that can change the current guidance.
New guidance will be issued, they say, whenever it’s warranted.
For more information on the employee retention credit, check out the Frequently Asked Questions on Tax Credits for Required Paid Leave and other topics found on the Coronavirus page on the IRS website, IRS.gov.