RINA Alert - August 6, 2021 | Volume 19, Issue 16
Wednesday the IRS answered some long-outstanding questions on the Employee Retention Credit (ERC). The new guidance is posted online as Notice 2021-49, and it covers topics ranging from whether wages paid to majority shareholders qualify for ERC to the definition of “full-time employee (FTE)” and whether full-time equivalents qualify as FTEs.
The ERC is an often underutilized COVID relief program which allows businesses to claim a payroll tax credit of up $7,000 per employee per quarter or $28,000 per employee for the year in 2021. RINA provided qualification requirements and details on the program in March, and this week’s IRS statement resolves some of the implementation and eligibility questions.
The issue of wages paid to majority shareholders is of interest to many RINA clients. The ERC rules say that wages paid to “related individuals” of majority shareholders cannot be claimed for a credit.
The IRS decided that if a majority shareholder has any of a list of specified relatives (siblings, ancestors, or lineal decedents) then the shareholder cannot receive a credit. This is true even if none of the relatives work with the company or hold a separate stake in it. However, the IRS rules do not consider married couples as related. So if a married couple are majority stakeholders and if each of them has none of the specified relations, then they can receive an ERC.
As released Wednesday, the IRS’s position eliminates the eligibility of almost all majority stakeholders to receive an ERC. Only majority stakeholders who are childless orphans would qualify for ERC, and then only if they have no brothers or sisters.
Other clarifications in the IRS notice were more friendly to taxpayers.
- For purposes of determining whether an eligible employer is a large eligible employer or a small eligible employer, employers are not required to include full-time equivalents when determining the average number of full-time employees. However, 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, assuming all other requirements to treat the amounts as qualified wages are satisfied.
- Cash tips earned by employees may be counted as wages and the business may claim both the ERC and the IRC §45B Employer Tax Credit for FICA paid on tip income, so long as that income is not used to bring the wages up to the Federal minimum wage
- If a business amends its 2020 Form 941 to claim the ERC, it must file an amended Federal income tax return or administrative adjustment request to correct any overstated deduction taken with respect to the same wages
- Employees are not required to be consistent in their choices of alternative quarter election for showing declines in gross receipts
- The IRS announced that Gross Receipts Safe Harbor announced previously will continue to apply to employers who acquire businesses in 2021 for the purposes of measuring whether a decline in gross receipts occurred.
The IRS’s written guidance is complex, and we urge you to contact your RINA advisor or the RINA CARES Team for advice for your specific situation. Please also reach out to RINA if you have not applied for an ERC and you believe you may be eligible.