The IRS has issued guidance on the Employee Retention Credit (IRS Notice 2021-20).
In short, the current rules require that employers looking to claim the ERTC must amend the applicable 2020 quarterly payroll tax filings (Form 941) and must also reduce the deduction claimed for their staff salaries on their 2020 practice tax return by the amount of the credit. You can read all 102 pages of this IRS Notice at: https://www.irs.gov/pub/irs-drop/n-21-20.pdf.
Here are some highlights:
- No deduction allowed for wages included in ERTC Calculation as follows: a similar deduction disallowance applies under section 2301(e) of the CARES Act with regard to the employee retention credit, such that an employer’s deduction for qualified wages, including qualified health plan expenses, is reduced by the amount of the employee retention credit.
- Family members don’t count as follows: wages paid to related individuals may not be taken into account for determining qualified wages for the employee retention credit.
- No Credit for Schedule C Income as follows: Self-employed individuals are not eligible for the employee retention credit with respect to their own self-employment earnings. However, a self-employed 21 individual who employs other individuals in the self-employed individual’s trade or business and who otherwise meets the requirements to be an eligible employer may be eligible for the employee retention credit with respect to qualified wages the self-employed individual pays to the employees.
The IRS Notice (on page 87) details how to file for the ERTC for wages paid in 2020 as follows:
An eligible employer that received a PPP loan and did not claim the employee retention credit may file a Form 941-X for the relevant calendar quarters in which the employer paid qualified wages…[employers] should not use a subsequent Form 941 to claim an employee retention credit for qualified wages paid in the second quarter of 2020.
Please note that calculating the ERTC goes hand in hand with filing for the PPP Loan forgiveness. The rules seem to imply that you can re-figure the allowable payroll costs for the ERTC calculation even if you offset 100% of the PPP Loan with payroll costs for the forgiveness calculation. See examples starting on page 73 of the IRS notice at: https://www.irs.gov/pub/irs-drop/n-21-20.pdf.
Lastly, unlike other subsidies offered during the past 12 months including the PPP Loans and HHS Provider Relief Funds that provided relatively short windows to apply for those subsidies, practice owners eligible for the ERTC have 3 years to file an amended payroll tax form – 941-X. Our plan is to help our clients file for the ERTC this spring. Waiting until then will not risk your losing out on this valuable payroll tax credit offered by the federal government. You might also reach out to your payroll service to see when they will be ready to help their clients with the revised ERTC rules.