Employee Retention Credit – Further Clarifications by Notice 2021-20
Published March 3, 2021
How are the aggregation rules applied across parent-subsidiary or brother sister companies?
The rules are applied for the following:
- Shutdowns or partial shutdowns – so if one of the companies qualifies then all the companies qualify under these criteria.
- Decline in Gross Receipts – the 50% (2020) or 20% (2021) decline must be applied for all companies to qualify.
- Full-time Employees – the 100 employee FTE (2020) or 500 employee FTE (2021) applies to all companies in total.
- Maximum Credit – if you have employees that work across companies the maximum credit per employee is maxed at $5,000 employee. Each company would take their prorate share.
What factors determine a nominal effect during a shutdown?
One of the qualifying factors for a partial shutdown is if the shutdown had a nominal effect on your business. The nominal effect is determined to be at least a 10% effect. The following are some factors that could be limited:
- Limiting Capacity
- Services being on an appointment basis when previously walk-ins were available.
- Changing format of services such as eliminating self-services or buffets; however, carryout would not qualify.
- Reduction of hours
What wages qualify during a shutdown?
If a shutdown or partial shutdown is your qualifying factor for the credit, then the qualifying wages are only during the period of the shutdown. Qualifying Wages have been clarified to exclude pretax dependent care and qualified transportation benefits. Health insurance benefits paid by both the employer and pre-tax employee contributions are included in determining your maximum qualified wages.
What wages are excluded from Qualifying Wages?
Wages paid to owners with greater than 50% ownership and their relations are not qualifying wages.
For large employers (>100 (2020) or >500 (2021)), vacation, holiday, sick or other similar paid days are not qualifying wages as they are considered for previous service. As a reminder only non-performing wages qualify for large employers. If a large employer pays an employee full wages and the employee has been deemed to only have performed services for 50% of the time, then the remaining 50% will qualify.
How does the ERC and PPP interact for excess wages and costs?
Interaction of the ERC and PPP has been clarified that any excess wages submitted on a PPP loan application are eligible for the ERC. For example, if the company has a PPP loan of $100,000 and included $150,000 of wages on the forgiveness application, the excess $50,000 wages would qualify for the ERC qualifying wages.
The guidance has further noted that if the company had other qualifying costs but were not included on the application, these costs will NOT make the wages available for the ERC. Same facts as example above however the company has $25,000 of other qualifying costs eligible for PPP forgiveness. If the company had used the $25,000 for their forgiveness, then they would have had $75,000 of excess wages. If not included the excess wages remain at $50,000.
How should the ERC be accounted for tax purposes?
The Employee Retention Credit is reported as a reduction of expense and should not be included as part of gross receipts. The reduction of expense is applied to the wages only and not the employer’s matching portion of the FICA or Medicare taxes.