The Internal Revenue Service and the Treasury Department released guidance for employers who pay qualified wages after June 30, 2021, and before January 1, 2022, and Congress considered a proposal to end the tax break next month.
The employee retention credit was included last year as part of the CARES Act by offering tax credits to encourage more businesses to retain employees at the height of the COVID-19 pandemic in March 2020. However, the Paycheck Protection Program, with forgivable loans from the Small Business Administration, proved to be a more popular way for businesses to get help from the federal government. Initially, businesses couldn’t take advantage of both programs, but later legislation passed last December allowed them to use both the PPP and the ERC.
Under the American Rescue Plan Act, the employee retention credit was extended until the end of the year, but the bipartisan infrastructure bill that the Senate is taking up this week proposes to end the tax credit in September. Lawmakers contend the program hasn’t been used by enough businesses to justify keeping it for the rest of the year.
The new notice explains changes made by the American Rescue Plan Act of 2021 to the employee retention credit that are applicable to the third and fourth quarters of 2021. It also explains that the employee retention credit does not apply to qualified wages taken into account as payroll costs in connection with a shuttered venue grant under section 324 of the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, or a restaurant revitalization grant.
Form 941, the employer’s quarterly federal tax return, is one way to claim the credit whereby employers can report their total qualified wages and the related health insurance costs for each quarter on a Form 941 for the period in question.
The IRS seems to have been holding up many of the tax credit claims due to the backlog at the resource-constrained agency.
Frequently asked questions and updates on the employee retention credit, tax credits for required paid leave and other items can be found on the coronavirus page of IRS.gov.