Last Updated on September 30, 2021

New Guidance on Claiming the Employee Retention Credit

Although the Employee Retention Tax Credit (ERTC) is expiring at the end of 2021, there’s still time for eligible businesses to claim the credit, if they haven’t already.

The ERTC, also referred to as the Employee Retention Credit (ERC), was created by the Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law in March 2020, to encourage businesses to keep employees on their payroll. The Consolidated Appropriations Act, 2021 (CAA), enacted in December 2020, and the American Rescue Plan Act (ARPA), enacted in March 2021, amended and extended the credit and the availability of certain advance payments of the credits through the end of 2021.

On Aug. 4, the IRS issued further guidance on the employee retention credit, including guidance for employers who pay qualified wages after June 30, 2021, and before Jan. 1, 2022, and issues that apply to the employee retention credit in both 2020 and 2021.

Notice 2021-49 amplifies prior guidance regarding the employee retention credit provided in Notice 2021-20 and Notice 2021-23.

The new guidance addresses changes made by the American Rescue Plan Act (ARPA) to the employee retention credit that are applicable to the third and fourth quarters of 2021. Those changes include, among other things:

• Making the credit available to eligible employers that 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.”
• 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 ARPA.

Notice 2021-49 also responds to various questions that the Treasury Department and the IRS have been asked about the employee retention credit for both 2020 and 2021, including:

• 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.
• Whether wages paid to majority owners and their spouses may be treated as qualified wages.

A Guide To Reporting ERTC

Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their employment tax returns (generally, Form 941, Employer’s Quarterly Federal Tax Return) for the applicable period.

If a reduction in the employer’s employment tax deposits is not sufficient to cover the credit, certain employers may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Updates on the employee retention credit, Frequently Asked Questions on Tax Credits for Required Paid Leave and other information can be found on the Coronavirus page of IRS.gov.