The IRS and the Treasury Department recently released guidance, Notice 2021-49, on the Employee Retention Tax Credit (“ERTC”), including guidance for the third and fourth quarters of 2021. The ERTC is a fully refundable payroll tax credit and has proven to be a massive benefit for large and small businesses. Eligible businesses can claim a credit for up to $7,000 per employee per quarter ($28,000 per employee per year).
Notice 2021-49 amplifies guidance provided earlier this year and answers some critical questions that business owners have been asking ever since the credit was signed into law. Some of those critical questions and answers are outlined below:
Question: Are wages paid to majority owners considered qualified wages for purposes of computing the credit?
Answer: Generally, no. Any wages paid to owners that own more than 50% of a business are not considered qualified wages. Furthermore, wages paid to a majority owner’s spouse or other family members (as defined in IRC Section 267) are not regarded as qualified wages and may not be used to claim the ERTC. However, there is one (relatively rare) exception to this rule. The exception is if the majority owner does not have any lineal decedents (as defined in IRC Section 267), then the majority owners’ wages would in fact, qualify. This holds true even if the lineal decedent(s) isn’t an employee of the business.
Question: Is the “Alternative Prior Quarter Election” available for the third and fourth quarters of 2021?
Answer: Yes. Notice 2021-49 extends the use of the Alternative Prior Quarter Election through the end of 2021. This election provides taxpayers with the option to use the prior quarter’s gross receipts when determining their eligibility for the ERTC for any particular quarter. For example, assume a taxpayer is claiming the ERTC for the third quarter of 2021, then that business may elect to compare the gross receipts for the second quarter of 2021 with the second quarter of 2019. When comparing these two quarters, if there is a decline in gross receipts of at least 20%, the taxpayer would be eligible to claim the ERTC for the third quarter of 2021. This is a very taxpayer-friendly provision.
Question: Are tips considered qualified wages?
Answer: Generally, any cash tips of $20 or more can be treated as qualified wages if all other requirements to treat the amounts as qualified wages are satisfied.
Question: If a taxpayer amended a previously filed Form 941 in order to claim the ERTC for a 2020 quarter, how does that impact their tax filing for the 2020 tax year?
Answer: According to previous IRS guidance, taxpayers must reduce their deductible payroll expenses by the amount of any ERTC claimed. Notice 2021-49 clarifies that a taxpayer must reduce its deductible expenses on its 2020 tax return if they had claimed the ERTC for qualified expenses paid or incurred during the 2020 tax year. For example, if a taxpayer has claimed the ERTC on a 2020 Form 941, they must reduce their deductible payroll expenses on their 2020 tax return. If a taxpayer has already filed a 2020 tax return, then the return must (unfortunately) be amended.
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