Employers, accountants and financial advisors recently received new guidance from the IRS on the extremely important and somewhat complicated Employee Retention Credit (”ERC”) which was passed as part of the Cares Act in February of 2020, and became available retroactively and going forward in 2021 to PPP Borrowers.
Brandon Ketron, JD, CPA and I presented the below webinar on Saturday, August 7th that you are welcome to watch which covers what to do if you have already filed to receive the credit for an owner who has a relative.
We also wrote about the recently issued Paycheck Protection Program guidance as is included in our Forbes article entitled Borrower Friendly PPP Loan Forgiveness Regulatory Changes Provided By The New SBA Regulation.
The ERC has been a godsend for a great many small businesses that would not have survived, or even now be surviving without it. Unfortunately, it has literally taken an army of accountants throughout the United States to decipher the rules and apply them to Form 941 filings, in order to obtain the credit for struggling small businesses.
My blog post of Friday, August 6 describes the nonsensical disqualification of 51% (or more) owners of small companies from having their wages qualify for this credit of up to $7,000 per calendar quarter per employee, if they have one or more relatives. It is simply amazing that the law has been interpreted to say that those without relatives can receive the credit, and those with relatives cannot. Many divorces will result from this, and many adoptions will be stopped in their tracks as the IRS encourages business owners not to have relatives.
You can read about this at Newly Issued Employee Retention Credit Guidance Punishes Owner Employees If They Have Living Family Members. Many readers have asked us what to do if they have already taken the credit for a majority owner who has family members. This is discussed in our video, and the good news is that we do not believe that there is a legal requirement to amend the Form 941 return or to give back the money that has been or will be received for a return that was filed before this news revelation was made public. Under Treasury Circular 230 an advisor is obligated to encourage a client to amend an inaccurate return, but the client is under no legal obligation to do so if there was no fraudulent intent when the return was filed.
Many reputable tax advisors who conducted research determined that owners with relatives should not be prevented from taking the credit under the original CARES act language, so we do not expect that taxpayers who filed Form 941’s and received the credit before this new announcement will have to pay penalties if they are audited.
Besides the aforementioned prohibition, there were four other significant updates to the ERC under IRS Notice 2021-49. These updates include clarifications as to (1) confirming that cash tips are qualified wages (people rarely tip their lawyers, so we were not so concerned about this one), (2) if an employer may claim both the ERC and the Internal Revenue Code Section 45B “Tip Tax Credit” that applies to food and beverage workers and those who deliver food and beverages, (3) the classification of part-time employees for the purpose of determining business size, and (4) instructions on amending filed income tax returns returns after receiving the ERC.
TIPS ARE WELL TREATED
The first clarification is regarding cash tips, which are treated as wages under the definition of Wages in Section 3121(a) of the Internal Revenue Code, and other compensation within the definition of Section 3231(e)(3). The IRS has stated that these tips are treated as qualified wages under the ERC rule, if all other requirements for qualified wages have been met (such as not claiming more than $10,000 per/ employee per fiscal quarter). This will be particularly welcomed by business owners in the restaurant/service industry areas which were hit particularly hard by the COVID pandemic and are now being hit again by the Delta variant.
DOUBLE DIPPING ON TIPPING
IRS has confirmed that Employers can claim both the ERC and the Section 45B “Tip Tax Credit”, which allows for “food and beverage establishments” to claim a tax credit for Federal Insurance Contribution Act taxes paid on tips given by customers in the food or beverage industry. This eliminates having to spend time and money to determine what tips have been claimed for what credit, and naturally, more money for business owners.
This will be a large windfall for strip clubs who have treated their performers as employees. I am not allowed to go to strip clubs, and therefore am not able to verify what the specific impact might be. Clubs may wish to convert rental and independent contractor arrangements to employment relationships going forward. Many strip clubs added food and beverage services to their business in order to attempt to qualify for PPP loans. If the performers also serve food and beverages, there may be a double benefit. Please do not tell Marcia about this blog post.
Will taxi drivers become employees and begin serving food and beverages? Will Uber Eats drivers form S Corporations and pay themselves a minimum wage, while receiving tips personally to get the double credit?
Any industry that can reduce what the customer pays for company and increase tips relating to food and beverage may be well advised to do so.
THE CREDIT GOES TO THE BUSINESS, NOT THE WORKER
It is of interest that the credit goes to the business as if it paid the worker, and not the worker itself. Such is life. At least the business has a better chance of staying open so that the worker has a better chance of working and receiving more tips. Businesses will pressure workers to more thoroughly report their tips as a result of this credit.
THE 30 HOURS A WEEK OR 130 HOURS PER MONTH RULE
A smaller, but potentially impactful clarification was provided on the classification of full-time employees for the purposes of determining if an employer’s business is large or small. If an employer has more than 500 employees in 2021, then they will only be eligible for the credit if the excess employees stay home and do not provide any services for the business. When determining if an employee counts towards this 500 employee limit, only full-time employees who work at least 30 hours per week or 130 hours per month are counted. Please note that this is distinct from the “full-time equivalent” definition used by the SBA for the sake of PPP loans.
This will cause businesses that have just over 500 employees to limit working hours to not exceed 30 hours a week or 130 hours a month, reducing the work force, and causing there to be more part-time workers handling two jobs and not being eligible for group health care benefits. This may also cause more businesses to try to treat workers as independent contractors to keep them off of the tax roles.
Diverting from the welcome updates to the more tedious, any filers who did not include the ERC credit in their 2020 tax return but did receive the ERC credit later that year (i.e. those that filed for the PPP and submitted their return before filing for both the ERC and PPP was allowed) are required to file amended 2020 returns to correct wage deductions. In simpler words, any year in which an employer receives ERC wage credits, that credit must be reflected in the corresponding tax year, even if it necessitates amending returns retroactively.
These changes and clarifications are a good step forward for the most part for small businesses who have been waiting for many months for this guidance, which helps to mitigate some of the disappointment that business owners are feeling (and losing $7,000 per quarter/per owner) regarding the disqualification of majority owner family wages.
Tax professionals may want to consider purchasing our book called The Employee Retention Credit Guide: Everything You Need to Know, and More to Claim and Receive the Employee Retention Credit from Amazon.com. If you buy it this week, send me an email with proof of purchase at firstname.lastname@example.org and you will get your choice of any one of my other books for free and a red line updated version of this ERC book that will come out within one week.