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Employee Retention Credit Guidelines

On August 4th, the IRS issued Notice 2021-49, Guidance on the Employee Retention Credit under Section 3134 of the Code and on Miscellaneous Issues Related to the Employee Retention Credit. The purpose of the new notice is two-fold—it provides guidance on both the extension and the modification of the Employee Retention Credit (ERC).
 The new guidance specifically addresses the rules of the ERC as it pertains to the third and fourth quarters of 2021. While the ERC essentially functions the same as in the first and second quarters of 2021 in most cases, the notice specifies the following:
  • Employers eligible to claim the ERC for the second half of 2021 include three categories: (1) employers whose operations are fully or partially paused due to COVID-19 government regulations, (2) employers experiencing a decline in gross receipts, and (3) employers that are recovery startup businesses.
  • Recovery startup businesses are those that do not fit into either the first or second category above, that began operating after February 15, 2020, and that do not surpass a certain income threshold for the three tax years prior to when it claims the ERC.
  • For the second half of 2021, eligible employers are instructed to claim the ERC against their share of Medicare tax (as opposed to against their share of the Social Security Tax, as with previous quarters).
  • Recovery startup businesses have a different maximum ERC limit than businesses in the first two categories.
Additionally, the notice offers guidelines for a number of miscellaneous areas, including:
  • Coordination with the Section 45B Tip Credit – An employer can receive both the ERC and the Tip Credit on the same wages; however, employers must still reduce the deductible wages by the amount of the ERC and the deductible taxes by the amount of the tip credit.
  • Employee Tips – Employee tips are treated as qualified wages for the ERC as long as they are treated appropriately as wages for FICA purposes.
  • Timing of the Wage Deduction Disallowance – Wages used for the ERC must be treated as nondeductible in the same year the wages are paid.
  • Related Individuals – The guidance clarified that, in the majority of circumstances, majority owners and spouses do not qualify for the credit due to the implications of the attribution and family relationships rules in the law.