At the start of the pandemic, Congress created two main ways to help employers keep employees on the payroll: the Employee Retention Credit (ERC), which returns wages paid to employees back to their employers in the form of a tax credit, and the Paycheck Protection Program (PPP) which allowed employers to apply for forgivable loans through their banks.
At first, employers had to choose between the two programs, but eventually the rules were changed and employers could be eligible to participate in both programs.
Earlier this week, the IRS released guidance on how changes made by the latest recovery package, the American Rescue Plan, will be put into practice.
We should also note that this is all somewhat tenuous, as Congress is currently wrestling with the decision of whether to end the ERC early, at the end of September, in order to save those funds to pay for a proposed bipartisan infrastructure bill. When Congress comes to a decision on that, we will be sure to let you know.
Here is a roundup of these changes as they stand now and how they might affect business owners:
1. The ERC is now available through the end of 2021. With the extension come some special rules for Q3 and Q4, outlined below.
2. Recovery startup businesses are now eligible. If a company started after February 15, 2020 and had less than $1 million in gross receipts in the previous three years, it’s a recovery startup business. This means it may apply for the credit for Q3 and Q4 for up to $50,000 each, even if it doesn’t meet some of the other key qualifications for employer eligibility.
3. There is a new definition of “severely financially distressed” employers. For Q3 and Q4, businesses are considered “severely financially distressed” if they had a 90% decline in gross receipts in Q3 or Q4 compared to the same quarter in 2019. This is important because being classified as “severely financially distressed” allows an employer to apply for the tax credit regardless of whether the employer has more than 500 employees.
4. Tips are now considered qualified wages. As long as tips are considered Medicare wages, they are now eligible wages for the purposes of the ERC.
5. A business owner’s spouse’s or sister’s wages probably don’t count. When a business owner’s spouse, family member, or spouse’s family member works for the company, their wages cannot be included in the calculation of the credit.
If you have questions about whether your business is eligible for the ERC or whether these new rules affect your eligibility, reach out to us at info@sbfcpa.com.