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IRS guidance: Retroactively claiming the 2020 ERC

03.09.21

Read this if you are an employer looking for more information on the Employee Retention Credit (ERC).

As we previously wrote, the Consolidated Appropriations Act, 2021 expanded, retroactively to March 12th, 2020, the Employee Retention Credit (ERC) to include those otherwise eligible employers who also received Paycheck Protection Program (PPP) loans. For those employers, wages qualifying for the ERC include wages that were not paid for with proceeds from a forgiven PPP loan. 

IRS guidance released

Recently, the Internal Revenue Service (IRS) released guidance under Notice 2021-20 (the Notice) clarifying how eligible employers who also received a PPP loan during 2020 can retroactively claim the ERC. The Notice also formalizes and expands on prior IRS responses to FAQs and addresses changes made since the enactment of the Act; it contains 71 FAQs. The IRS has stated it will address calendar quarters in 2021 in later guidance.

Under the 2020 ERC rules, an eligible employer may receive a refundable credit equal to 50% of qualified wages and healthcare expenses (up to $10,000 of wages/health care expenses per employee in 2020) paid by a business or not-for-profit organization that experienced a full or partial suspension of their operations or a significant decline in gross receipts. For employers that received a PPP loan, Q&A 49 of the Notice outlines the IRS’ position on the interaction with the ERC for 2020. 

An eligible employer can elect which wages are used to calculate the ERC and which wages are used for PPP loan forgiveness. The Notice provides for a deemed election for any qualified wages  included in the amount reported as payroll costs on the PPP Loan Forgiveness Application, unless the included payroll costs exceed the amount needed for full forgiveness when considering only the entries on the application. The text of Q&A 49 appears to treat the minimum amount of payroll costs required for PPP loan forgiveness (i.e., 60%) as being the deemed election as long as there are other eligible non-payroll expenses reported on the application to account for the other 40% of loan forgiveness expenses.

Payroll costs reported on the PPP Loan Forgiveness Application: Examples

The examples make it clear the payroll costs reported on the PPP Loan Forgiveness Application and needed for loan forgiveness are generally excluded from the ERC calculations. The qualified wages included on the PPP Loan Forgiveness Application that may be included in the ERC calculations are partially impacted by the documented non-payroll expenses included in the PPP Loan Forgiveness Application. Following are a few examples from the Notice. Each example outlines the interaction between payroll costs reported on the PPP Loan Forgiveness Application and the qualified wages for the ERC.

Example #1: An employer received a PPP loan of $100,000 and has both payroll and non-payroll costs that far exceed the borrowed amount. The employer only reports payroll costs of $100,000 on the PPP Loan Forgiveness application to simplify the forgiveness process. The employer cannot use any of the $100,000 of payroll costs to claim the ERC. This is notwithstanding the fact that 100% forgiveness may have been achieved by reporting only $60,000 of payroll costs and the remaining $40,000 from non-payroll costs.   

Example #2: An employer received a PPP loan of $200,000. The employer submitted a PPP Loan Forgiveness Application and reported $250,000 of qualified wages as payroll costs in support of forgiveness of the entire PPP loan. The employer is deemed to have made an election not to take into account $200,000 of the qualified wages for purposes of the ERC, which was the amount of qualified wages included in the payroll costs reported on the PPP Loan Forgiveness Application up to (but not exceeding) the minimum amount of payroll costs. The employer is not treated as making a deemed election with respect to $50,000 of the qualified wages ($250,000 reported on the PPP Loan Forgiveness Application, minus the $200,000 PPP loan amount forgiven), and it may treat that amount as qualified wages for purposes of the ERC.

Example #3: An employer received a PPP loan of $200,000. The employer is an eligible employer and paid $200,000 of qualified wages that would qualify for the employee retention credit during the second and third quarters of 2020. The employer also paid other eligible expenses of $70,000. The employer submitted a PPP Loan Forgiveness Application and reported the $200,000 of qualified wages as payroll costs, as well as the $70,000 of other eligible expenses, in support of forgiveness of the entire PPP loan. In this case, the employer is deemed to have made an election not to take into account $130,000 of qualified wages for purposes of the ERC, which was the amount of qualified wages included in the payroll costs reported on the PPP Loan Forgiveness Application up to (but not exceeding) the minimum amount of payroll costs, together with the $70,000 of other eligible expenses reported on the PPP Loan Forgiveness Application, sufficient to support the amount of the PPP loan that was forgiven. As a result, $70,000 of the qualified wages reported as payroll costs may be treated as qualified wages for purposes of the ERC.

Key takeaway:

For purposes of PPP loan forgiveness, an employer must generally submit payroll expenses equal to at least 60% of the loan amount to maximize loan forgiveness and to maximize the available wages for the ERC. If an employer does not report non-payroll costs (or limits the amount it reports) on the PPP Loan Forgiveness Application then doing so will have a direct impact on the wages available for the ERC. 

An employer must also consider the payroll costs reported on the PPP Loan Forgiveness Application and the payroll costs necessary to maximize the ERC. For example, if an employer does not qualify for the ERC until the third quarter of 2020, it should consider limiting the amount of wages reported on the PPP Loan Forgiveness Application that are attributable to the third quarter in order to maximize the wages available for the ERC.

How to claim the Employee Retention Credit

An eligible employer that received a PPP loan and did not claim the ERC may file a Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return for the relevant calendar quarters in which the employer paid qualified wages, but only for qualified wages for which no deemed election was made. 

Form 941-X may also be used by eligible employers who did not receive a PPP loan for 2020, but subsequently decide to claim any ERC to which they are entitled for 2020. 

The deadline for filing Form 941-X is generally within three years of the date Form 941 was filed or two years from the date you paid the tax reported on Form 941, whichever is later.

For more information

If you have more questions, or have a specific question about your situation, please call us. We’re here to help.

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BerryDunn experts and consultants

Read this if you are a plan sponsor of employee benefit plans.

UPDATE: On December 1, 2022, the proposed rule was finalized with changes and will be effective 60 days after publication in the Federal Register (therefore, January 30, 2023).

The Department of Labor (DOL) is preparing to finalize a proposed rule that changes the way environmental, social, and governance (ESG) factors are viewed in a plan sponsor’s investment process and proxy voting methods. The proposal, which was issued in October 2021, aims to help plan sponsors understand their responsibilities when investing in ESG strategies and makes significant changes to two previously issued ESG rules.

Here, we provide an update on the DOL’s proposed rule and seek to help plan sponsors understand their potential new responsibilities when considering ESG investments. 

Background on ESG rules

For many years, the DOL has considered how non-financial factors, such as the effects of climate change, may affect plan sponsors’ fiduciary obligations. Amid an increasing focus on ESG investments, the Trump administration issued a final rule on ESG in November 2020 that required plan fiduciaries to only consider financial returns on investments—and to disregard non-financial factors like environmental or social effects. The rule also banned plan sponsors from using ESG investments as the Qualified Default Investment Alternative (QDIA).

A separate ruling issued in December 2020 said that managing proxy and shareholder duties (for investments within the plan) should be done for the sole benefit of the participants and beneficiaries—not for environmental or social advancements. It also stated that fiduciaries weren’t required to vote on every proxy and exercise every shareholder right.

In March 2021, the Biden Administration said it would not enforce the previous year’s rulings until it finished its own review. The current proposed rule is the result of that research.

Overview of the new proposed ESG rule

In October 2021, the DOL proposed a new rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.” According to the proposed rule, fiduciaries may be required to consider the economic effects of climate change and other ESG factors when making investment decisions and exercising proxy voting and other shareholder rights. The proposal states that fiduciaries must consider ESG issues when they are material to an investment’s risk/return profile. The rule also reversed a previous provision on QDIAs, paving the way for ESG investment options to be used in automatic enrollment as long as such investment options meet QDIA requirements.

The new ESG rule also made several changes to fiduciaries’ responsibilities when exercising shareholder rights. First, it changed a provision on proxy voting, giving fiduciaries more responsibility in deciding whether voting is in the best interest of the plan. Second, it removed two “safe harbor” examples of proxy voting policies. Next, the proposed rule eliminated fiduciaries’ need to monitor third-party proxy voting services. Lastly, the proposal removed the requirement to keep detailed records on proxy voting and other shareholder rights.

In addition, the DOL updated the “tie-breaker test” to allow fiduciaries the ability to choose an investment that has separate benefits (e.g., ESG factors) if competing investments equally serve the financial interests of the plan.

Comment letter analysis shows broad support for the proposed rule

The DOL received more than 22,000 comment letters for the proposed regulation. Ninety-seven percent of respondents support the proposed changes according to an analysis of the comment letters by the Forum for Sustainable and Responsible Investment (US SIF), a membership association that promotes sustainable investing. While some respondents asked the DOL to revisit the tie-breaker provision and other specifics of the proposed rule, many respondents agreed that the proposed rule clears the way for fiduciaries to consider adding ESG investment options to benefit plans.

Insight: Consider how the proposed ESG rule affects your plan today

Based on the typical timeline for similar rule changes, the DOL is expected to issue its final version of the proposed rule by mid- to late-2022. This means that plan sponsors shouldn’t have to wait long for clarification on their ability to add ESG investments to their plans. To prepare for the potential changes, plan sponsors should review the proposed rule and consider creating a prudent selection process that reviews all aspects that are relevant to an investment’s risk and return profile. As always, documentation is a critical step in this process.

If you have any questions about your specific situation, please reach out to our employee benefit consulting team. We're here to help.

Article
DOL proposes changes to ESG investing and shareholder rights: What plan sponsors need to know

Read this if your company is a benefit plan sponsor.

While plan sponsors have been able to amend their 401(k) plans to include a post-tax deferral contribution called Roth for more than a decade, only 86% of plan sponsors have made it available to participants, according to the Plan Sponsor Council of America. Meanwhile, despite the potential benefits of such plans, just a quarter of participants who have access to the Roth 401(k) option use it. Plan sponsors may want to consider adding a Roth 401(k) option to their lineup because of the potential tax benefits and other advantages for plan participants.

A well-designed Roth 401(k) may be an attractive option for many plan participants, and it is important for plan sponsors considering such a feature to design the plan with the needs of their workforce in mind. It is also critical to clearly communicate the differences from the pre-tax option, specific timing rules required, and the tax-free growth it offers. Additionally, plan sponsors should be mindful of potential administrative costs and other compliance requirements in connection with allowing the Roth option.

Roth 401(k)s: The basics

A Roth is a separate contribution source within a 401(k) or 403(b) plan that differs from traditional retirement accounts because it allows participants to contribute post-tax dollars. Since participants pay taxes on these contributions before they are invested in the account, plan participants may make qualified withdrawals of Roth monies on a tax-free basis, and their accounts grow tax-free as well.

Participants of any income level may participate in a Roth 401(k) and may contribute a maximum of $20,500 in 2022—the same limit as a pre-tax 401(k). Contributions and earnings in a Roth 401(k) may be withdrawn without paying taxes and penalties if participants are at least 59½ and it’s been at least five years since the first Roth contribution was made to the plan. Participants may make catch-up contributions after age 50, and they may split their contributions between Roth and pre-tax. Similar to pre-tax 401(k) accounts, Roth 401(k) assets are considered when determining minimum distributions required at age 72, or 70 ½ if they reached that age by Jan. 1, 2020.

Only employee elective deferrals may be contributed post-tax into Roth 401(k) accounts. Employer contributions made by the plan sponsor, such as matching and profit sharing, are always pre-tax contributions. If the plan allows, participants may convert pre-tax 401(k) assets into a Roth account, but it is critical to remember that doing so triggers taxable income and participants must be prepared to pay any required tax. In addition, plan sponsors must be careful to offer Roth 401(k)s equally to all participants rather than just a select group of employees.

Qualified distributions from a designated Roth account are excluded from gross income. A qualified distribution is one that occurs at least five years after the year of the employee’s first designated Roth contribution (counting the first year as part of the five) and is made on or after age 59½, on account of the employee’s disability, or on or after the employee’s death. Non-qualified distributions will be subject to tax on the earnings portion only, and the 10% penalty on early withdrawals may apply to the part of the distribution that is included in gross income. Participants may take out loans if permitted in the plan document. 

First steps for plan sponsors

A common misconception among plan sponsors is that a Roth offering requires a completely different investment vehicle. The feature is simply an added contribution option; therefore, no separate product is needed.

When considering the addition of a Roth 401(k) option, it is important for plan sponsors to check with service providers to determine whether payroll may be set up properly to add a separate deduction for the participant. Plan sponsors may also need to consider guidelines for conversions, withdrawals, loans, and other features associated with the Roth contribution source to ensure the plan document is prepared and followed accurately.

Education is an important component of any new plan feature or offering. Plan sponsors should check with service providers to see how they may help to explain the feature and optimize its rollout for the plan. One-on-one meetings with participants may be very helpful in educating them about a Roth account.

A word about conversions

If permitted by the plan document, participants may convert pre-tax 401(k) plan assets (deferrals and employer contributions) to the Roth source within their plan account. The plan document may allow for entire account conversions or just a stated portion. When assets are converted, participants must pay income taxes on the converted amount, and the additional 10% early withdrawal tax won’t apply to the rollover. Plan sponsors should educate participants on the benefits of converting to the Roth inside the company 401(k).

Collaborate with the right service providers to educate your participants

The right service providers may review your current plan design, set up accounts properly, actively engage and educate your participants, and offer financial planning based on individual circumstances to show how design features like a Roth account may benefit their situation. If you would like to start the conversation about adding a Roth option or enhancing your participant education program, contact our employee benefits team. We are here to help. 

Article
Plan sponsor alert: Roth 401(k) remains underutilized despite potential benefits

Read this if you are a plan sponsor of employee benefit plans.

Employee Retention Credit (ERC)

There is still time to claim the Employee Retention Credit, if eligible. The due date for filing Form 941-X to claim the credit is generally three years from the date of the originally filed Form 941. 

The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to COVID-related governmental orders or that experienced a significant reduction in gross receipts. 

The amount of the credit can be substantial. For 2020, the credit is 50% of the first $10,000 of qualified wages per employee for the qualifying period beginning as early as March 12, 2020, and ending December 31, 2020 (thus the max credit per employee is $5,000 in 2020). For 2021, the credit is 70% of the first $10,000 of qualified wages per employee, per qualifying quarter (thus the potential max credit is $21,000 per employee in 2021). 

For 2021, employers with 500 or fewer full-time employees in 2019 may include all wages and health plan expenses as qualified wages. For 2020, employers with 100 or fewer full-time employees in 2019 may include all wages and health plan expenses as qualified wages while employers with more than 100 full-time employees in 2019 may only claim the credit for qualified wages paid to employees who did not provide services. For purposes of determining full-time employees, an employer only needs to include those that work 30 hours a week or 130 hours a month in the calculation. Part-time employees working less than this would not be considered in the employee count.

There is additional interplay between claiming the ERC and the wages used for PPP loan forgiveness that will need to be considered. 

Student loan repayment programs

One of the benefits younger employees would like to receive from their employer is assistance with student loan repayments. A recent study indicated an employee would commit to working for an employer for at least five years if the employer assisted with student loan payments. Some employers have been providing such a benefit and, until 2020, any student loan payments made by the employer would have been considered taxable income. 

Beginning in 2020 and through 2025, at least for now, employers are permitted to provide tax-free student loan repayment benefits to employees. In order to receive tax-free payments, such a plan must be in writing and must be offered to a non-discriminatory group of employees. In addition, the tax-free benefit must be limited to $5,250 per calendar year. Now may be the time to consider offering student loan repayment benefits to help retain and attract employees.

Automatic enrollment for employee deferrals in 401(k)/403(b) plan

Most employers offer an employer-sponsored retirement plan such as a 401(k) plan or 403(b) plan to their employees. However, the federal government and several state governments are concerned that employees are either not saving enough for retirement and/or do not have access to an employer-sponsored retirement plan. Some states are mandating the establishment of an employer-sponsored retirement plan, or mandatory participation in a state-sponsored multiple employer plan (MEP). Other states are mandating that employers who do not sponsor a 401(k) or 403(b) plan provide automatic employee payroll deductions into a state-sponsored Individual Retirement Account (IRA) type vehicle sponsored by the state. If you do not already sponsor a 401(k) or 403(b) plan you should confirm if your state has any requirements.

For those employers who do sponsor a 401(k) or 403(b) plan, you should consider implementing an automatic enrollment provision if you have not done so already. Automatic enrollment requires a certain percentage of an employee’s wages to be withheld and deposited into the 401(k) or 403(b) plan each pay period, unless the employee elects otherwise. While the current law does not require an employer to use automatic enrollment, there is pending legislation that would require an automatic enrollment provision in any new retirement plan. Even though existing plans would be grandfathered under the pending legislation, it may be worth implementing an automatic enrollment provision in the 401(k) or 403(b) plan to help and encourage employees to save for retirement. 

If you have questions about any of these or other employee benefit topics, please contact our Employee Benefits Audit team. We're here to help.

Article
Employee benefit plan updates: The Employee Retention Credit and student loan repayment programs

Read this if you are an employer that provides educational assistance to employees.

Under Section 127 of the Internal Revenue Code (IRC), employers are allowed to provide tax-free payments of up to $5,250 per year to eligible employees for qualified educational expenses. To be considered qualified, payments must be made in accordance with an employer’s written educational assistance plan. 

The Coronavirus Aid, Relief and Economic Security (CARES) Act amended Section 127 to include student loan repayment assistance as a qualified educational expense. The expansion of Section 127 allows employers to make payments for student loans without the employee incurring taxable income and the payment is a deductible expense for the employer, resulting in tax advantages to both parties.  

Originally, the CARES Act was a temporary measure allowing tax-free principal or interest payments made between March 27, 2020 and December 31, 2020.  Due to the difficulties in adopting a formal education assistance plan, many employers were unable to take advantage of the temporary incentive. As a result, the Consolidated Appropriations Act, signed into law on December 27th, 2020 extended the provision for five years through December 31, 2025.  

Employer requirements

For payments to qualify as tax-free under Section 127, you (the employer) must meet the following requirements: 

  • The employer must have a written educational assistance plan
  • The plan must not offer other taxable benefits or remuneration that can be chosen instead of educational assistance (cash or noncash)
  • The plan must not discriminate in favor of highly compensated employees
  • An employee may not receive more than $5,250 from all employers combined
  • Eligible employees must be reasonably notified of the plan

Eligible employees include current and laid-off employees, retired employees, and disabled employees. Spouses or dependents of employees are not eligible. Payments of principal or interest can be made directly to employees as reimbursement for amounts already paid (support for student loan payments should be provided by the employee) or payments can be made directly to the lender. Other educational expenses that qualify under Section 127 include:

  • Tuition for graduate or undergraduate level programs, which do not have to be job-related
  • Books, supplies, and necessary equipment, not including meals, lodging, transportation, or supplies that employees may keep after the course is completed

The five-year extension of this student loan repayment assistance can provide tax savings to both employers (employer portion of FICA) and employees (federal and state withholding, and FICA). Additionally, offering a qualified educational assistance program may help strengthen an employers’ recruitment and retention efforts. 

If you have more questions, or have a specific question about your situation, please call us. We’re here to help.

Article
CARES Act expansion of IRC Section 127: Tax savings on student loan repayment assistance

Read this if you are not familiar with the expansion of eligibility for employee retention credits (ERC).

Are you familiar with the IRS’ recent additional, taxpayer-friendly guidance that provides some clarity in claiming the employee retention credit (ERC)? 

Employee Retention Credits in the CARES Act: Background

Congress originally enacted the ERC in the CARES Act in March of 2020 to encourage employers to hire and retain employees during the pandemic. At that time, the ERC applied to wages paid after March 12, 2020 and before January 1, 2021. However, Congress later modified and extended the ERC to apply to wages paid before July 1, 2021. Then with the American Rescue Plan Act (ARPA) signed into law on March 11, 2021, the ERC was modified to apply to wages paid through December 31, 2021. The recently passed infrastructure bill eliminates the ERC the quarter ending December 31, 2021.

The rules are complex but there may be some limited ability for your organization to benefit, based on some late changes to the rules. Originally, taxpayers who received PPP loans were not eligible, but the rules changed and now provide that employers who received PPP loans may qualify for the ERC with respect to wages that were not paid for with proceeds from a forgiven PPP loan. This change is retroactive to March 12, 2020. 

The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to COVID-related governmental order or that experienced a significant reduction in gross receipts.  

Regarding the reduction in gross receipts, for any quarter in 2020, a greater than 50% reduction in gross receipts is required during the calendar quarter compared to the same quarter of 2019 in order to qualify. For 2021, the eligibility threshold for employers is reduced from a greater than 50% to a greater than 20% decline in gross receipts for the same quarter of 2019 in order to qualify for the ERC for any quarter. There is an alternative quarter election for 2021 that allows employers to use prior quarter gross receipts compared to the same quarter for 2019 to determine eligibility. For example, for the first calendar quarter of 2021, an employer may elect to use its gross receipts for the fourth quarter of 2020 compared to those for the fourth calendar quarter of 2019 to determine if the decline in gross receipts test is met.

The IRS recently clarified that in determining gross receipts an employer does not need to include forgiven PPP loans, shuttered venue operator grants, or restaurant revitalization grants as gross receipts. Gross receipts for exempt organizations are calculated in the same manner as gross receipts on page 1 of Form 990 in Box G, which includes proceeds from the sales of investments as well as all contribution, program and investment revenue.

The amount of the credit can be substantial. For 2020, the credit is 50% of the first $10,000 of qualified wages per employee for the qualifying period beginning as early as March 12, 2020 and ending December 31, 2020 (thus the max credit per employee is $5,000 in 2020). For 2021, the credit is 70% of the first $10,000 of qualified wages per employee, per qualifying quarter (thus the potential max credit is $21,000 per employee in 2021).  

For 2021, employers with 500 or fewer full-time employees in 2019 may include all wages and health plan expenses as qualified wages. For 2020, employers with 100 or fewer full-time employees in 2019 may include all wages and health plan expenses as qualified wages while employers with more than 100 full-time employees in 2019 may only claim the credit for qualified wages paid to employees who did not provide services. For purposes of determining full-time employees, an employer only needs to include those that work 30 hours a week or 130 hours a month in the calculation. Part-time employees working less than this would not be considered in the employee count.

There is additional interplay between claiming the ERC and the wages used for PPP loan forgiveness that will need to be considered.  

What should you do now? 

It makes sense to determine your eligibility for the ERC. We recommend that you compile your business gross receipts by calendar quarter for 2019, 2020, and the first three quarters of 2021. Let us know if you want a template to do this. We can then help you evaluate whether you have any quarters where you might qualify for the ERC.  

Keep in mind that if your business operations were either fully or partially suspended due to a COVID-related government order then you will likely already qualify for that quarter but the eligible wages will only be for the wages paid during the shutdown period.  

Please let us know if you have any questions or need any assistance.

Article
CARES Act: Eligibility for employee retention credits

Read this if you paid wages for qualified sick and family leave in 2021.

The IRS has issued guidance to employers on year-end reporting for sick and family leave wages that were paid in 2021 to eligible employees under recent federal legislation.

IRS Notice 2021-53, issued on September 7, 2021, provides that employers must report “qualified leave wages” either on a 2021 Form W-2 or on a separate statement, including:

  • Qualified leave wages paid from January 1, 2021 through March 31, 2021 (Q1) under the Families First Coronavirus Response Act (FFCRA), as amended by the Consolidated Appropriations Act, 2021 (CAA).
  • Qualified leave wages paid from April 1, 2021 through September 30, 2021 (Q2 and Q3) under the American Rescue Plan Act of 2021 (ARPA).

The notice also explains how employees who are also self-employed should report such paid leave. This guidance builds on IRS Notice 2020-54, issued in July 2020, which explained the reporting requirements for 2020 qualified leave wages.

Employers should work with their IT department and/or payroll service provider as soon as possible to review the payroll system, earnings codes configuration and W-2 mapping to ensure that these paid leave wages are captured timely and accurately for year-end W-2 reporting.

FFCRA and ARPA tax credits background

In March 2020, the FFCRA imposed a federal mandate requiring eligible employers to provide paid sick and family leave from April 1, 2020 to December 31, 2020, up to specified limits, to employees unable to work due to certain COVID-related circumstances. The FFCRA provided fully refundable tax credits to cover the cost of the mandatory leave.

In December 2020, the CAA extended the FFCRA tax credits through March 31, 2021, for paid leave that would have met the FFCRA requirements (except that the leave was optional, not mandatory). The ARPA further extended the credits for paid leave through September 30, 2021, if the leave would have met the FFCRA requirements.

In addition to employer tax credits, under the CAA, a self-employed individual may claim refundable qualified sick and family leave equivalent credits if the individual was unable to work during Q1 due to certain COVID-related circumstances. The ARPA extended the availability of the credits for self-employed individuals through September 30, 2021. However, an eligible self-employed individual may have to reduce the qualified leave equivalent credits by some (or all) of the qualified leave wages the individual received as an employee from an employer.

Reporting requirements to claim the refundable tax credits

Eligible employers who claim the refundable tax credits under the FFCRA or ARPA must separately report qualified sick and family leave wages to their employees. Employers who forgo claiming such credits are not subject to the reporting requirements.

Qualified leave wages paid in 2021 under the FFCRA and ARPA must be reported in Box 1 of the employee’s 2021 Form W-2. Qualified leave wages that are Social Security wages or Medicare wages must be included in boxes 3 and 5, respectively. To the extent the qualified leave wages are compensation subject to the Railroad Retirement Tax Act (RRTA), they must also be included in box 14 under the appropriate RRTA reporting labels.

In addition, employers must report to the employee the following types and amounts of wages that were paid, with each amount separately reported either in box 14 of the 2021 Form W-2 or on a separate statement:

  • The total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2), or (3) of Section 5102(a) of the Emergency Paid Sick Leave Act (EPSLA)1  with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $511 per day limit paid for leave taken after December 31, 2020, and before April 1, 2021.”
  • The total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), or (6) of Section 5102(a) of the EPSLA with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $200 per day limit paid for leave taken after December 31, 2020, and before April 1, 2021.”
  • The total amount of qualified family leave wages paid to the employee under the Emergency Family and Medical Leave Expansion Act (EFMLEA) with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021. The following, or similar language, must be used to label this amount: “Emergency family leave wages paid for leave taken after December 31, 2020, and before April 1, 2021.”
  • The total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2), or (3) of Section 5102(a) of the EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $511 per day limit paid for leave taken after March 31, 2021, and before October 1, 2021.”
  • The total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), and (6) of Section 5102(a) of the EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $200 per day limit paid for leave taken after March 31, 2021, and before October 1, 2021.”
  • The total amount of qualified family leave wages paid to the employee under the EFMLEA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021. The following, or similar language, must be used to label this amount: Emergency family leave wages paid for leave taken after March 31, 2021, and before October 1, 2021.”

If an employer chooses to provide a separate statement and the employee receives a paper 2021 Form W-2, then the statement must be included with the Form W-2 sent to the employee. If the employee receives an electronic 2021 Form W-2, then the statement must be provided in the same manner and at the same time as the Form W-2.

In addition to the above required information, the notice also suggests that employers provide additional information about qualified sick and family leave wages that explains that these wages may limit the amount of the qualified sick leave equivalent or qualified family leave equivalent credits to which the employee may be entitled with respect to any self-employment income.

For more information

If you have more questions, or have a specific question about your particular situation, please call us. We’re here to help.

 1Employees are eligible for qualified sick leave under EPSLA if the employee:

  • Was subject to a federal, state or local quarantine or isolation order related to COVID-19;
  • Had been advised by a health-care provider to self-quarantine due to concerns related to COVID-19;
  • Experienced symptoms of COVID-19 and was seeking a medical diagnosis;
  • Was caring for an individual who was subject to a quarantine order related to COVID-19, or had been advised by a health-care provider to self-quarantine due to concerns related to COVID-19;
  • Was caring for a son or daughter of such employee, if the school or place of care of the son or daughter had been closed, or the child-care provider of such son or daughter was unavailable, due to COVID-19; or
  • Was experiencing any other substantially similar condition specified by the Secretary of Health and Human Services.

Article
IRS guidance to employers: Year-end reporting requirements for qualified sick and family leave wages

Read this if you are an employer looking for more information on the Employee Retention Credit.

The IRS recently released Notice 2021-49, providing updated guidance on the ERC. Here are a few of the more important points from the Notice.

Timing of qualified wages deduction disallowance. The general rule is an employer's deduction for qualified wages, including qualified health plan expenses, is reduced by the amount of the employee retention credit. The new guidance indicates an employer should file an amended federal income tax return or administrative adjustment request (AAR), if applicable, for the taxable year in which the qualified wages were paid or incurred to correct any overstated deduction taken with respect to those same wages on the original federal tax return.

This means that an employer who filed an amended Form 941 in 2021 to claim the ERC for 2020 would be required to file an amended 2020 tax form to correct an overstated deduction for the credit amount if the wage/health plan deductions on the originally filed tax return for 2020 were not reduced by the amount of the credit.

Wages of majority owners and spouses. If the majority owner (owns more than 50%) of a corporation has no brother or sister (whether by whole or half blood), ancestor, or lineal descendant then neither the majority owner nor the spouse is a related individual and the wages paid to the majority owner and/or the spouse are qualified wages for purposes of the ERC, assuming the other requirements for qualified wages are satisfied. In most cases, the wages of a majority owner and spouse will not be considered qualified wages. The Notice provides a number of examples to clarify this issue, including an example where wages of a majority owner or spouse may not be treated as qualified wages.

Calculation of fulltime employees. For purposes of determining whether an eligible employer is a large eligible employer (i.e., more than 100 in 2019 for 2020 or more than 500 in 2019 for 2021) or a small eligible employer, eligible employers are not required to include fulltime equivalents when determining the average number of full-time employees. This is great news for employers with a large part-time or variable hour employee workforce.

One final note
It appears the infrastructure bill that just passed in the US Senate would eliminate the ERC for the fourth quarter of 2021. If this provision holds, it would limit the total ERC that could be claimed for 2021.

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Updated guidance on the Employee Retention Credit (ERC): Important considerations for employers