As another year comes to a close, we recommend finding time to reflect on 2021…
COVID-19 Update August 11, 2021
As the COVID-19 delta variant spreads, many employers are asking what they can do if workers refuse to get vaccinated. Some employers are firing workers who won’t take the vaccine and others are requiring unvaccinated employees to submit to weekly testing and take other safety precautions.
It is legal to require workers to show proof of their vaccination status or wear N-95 masks and submit to regular COVID-19 testing, but employers must comply with the Americans with Disabilities Act (ADA), Title VII of the Civil Rights Act of 1964, and other workplace laws. Employment law attorneys recommend that businesses carefully craft vaccination policies, and they caution employers not to demand too much information. You shouldn’t ask any follow-up questions that could lead to HIPPA violations. Vaccination policies vary depending on whether an employer requires vaccines or makes them voluntary. Here is an overview of what to include in the policies.
At the same time, the labor shortage continues all over the country across all industries. Businesses are having the toughest time filling hourly, entry-level and midlevel nonmanagerial positions, especially in sectors such as manufacturing, hospitality, food service, and health care. Research shows there are as many openings as there are people classified as unemployed and looking for work. What we have heard from our employment connections around the US is that once the federal unemployment stipend runs out, the first few applicants start trickling in, but after the 3rd week the applicants start really flowing. In Louisiana, the expanded COVID-19 unemployment benefits finished at the end of July. Hope you all are starting to see more quality applicants.
Lastly, the IRS has published some additional information on ERTC to clarify a few things, but as always, they opened some new questions on other items. Keep in mind that “IRS position” is different than statutory or regulatory rule; currently, there is no statutory or regulatory guidance available regarding this tax legislation. Here’s the breakdown:
The Good News
The notice provides unexpected flexibility related to the Alternative Quarter election.
- This election does not have to be applied on a consistent manner for each subsequent quarter. This potentially allows an employer to be eligible for additional quarters using a combination of rules. For example, an employer may be an eligible employer due to a decline in gross receipts for the second quarter of 2021 (i.e., the employer does not rely on the alternative quarter election for the second quarter); the employer could then use the alternative quarter election to be an eligible employer for the third quarter of 2021 despite using the decline in gross receipts rule for the 2nd quarter of 2021.
There may be an opportunity to file additional 2020 and/or 2021 amended Form 941s. The 3rd and 4th quarter Form 941s to be filed may now allow for some additional ERC. Please contact us to discuss the potential opportunity to obtain more ERCs.
- Restaurant employee tips considered wages for purposes of the ERC.
- Tips must be included in the FICA wages of employee.
- Employee Tip Credit does not reduce wages eligible for ERC.
Clarifies the definition of “full time employee” relative to ERC
- Employee status relative to full-time or part-time is irrelevant and does not exclude wages if all other requirements are satisfied.
- New business ERC calculation for “Recovery Startup Businesses” – 3rd and 4th QTR 2021.
- Began carrying on a trade or business after February 15th, 2020.
- Must consider other related businesses in determining small business status.
- Not otherwise an eligible employer.
- Credit cannot exceed more than $50,000 per quarter.
If you believe you have a startup business as mentioned above, reach out to see if there is an opportunity to obtain an extra $50,000 of ERC for the 3rd and 4th quarter of 2021.
The Bad News
Clarifies timing of disallowed employer income tax deduction related to employee retention credit potentially requiring amended income tax returns.
- The income tax return that corresponds to that quarter where an ERC was claimed should be amended to reflect the reduced deduction.
If your business income tax return filed for 2020 did not reflect such a reduction, please reach out to discuss the issues involved in filing an amended return.
Clarifies the definition of related party as to “qualifying wages” as follows:
- Related party wages that do not qualify as wages for the ERC are broad and include the following:
- A child or a descendant of a child
- A brother, sister, stepbrother, or stepsister
- The father or mother, or an ancestor of either
- A stepfather or stepmother
- A niece or nephew
- An aunt or uncle
- A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
Clarifies thru examples of how the related party rules are interpreted by the IRS. See examples below. The IRS interpretation is quite unfavorable to majority owners and their relatives.
- Example 1: Corporation A is owned 80 percent by Individual E and 20 percent by Individual F. Individual F is the child of Individual E. Corporation A is an eligible employer with respect to the first calendar quarter of 2021. Both Individual E and Individual F are employees of Corporation A. Both Individual E and Individual F are treated as 100 percent owners of Corporation A. Accordingly, Corporation A may not treat as qualified wages any wages paid to either Individual E or Individual F because both Individual E and Individual F are each related individuals for purposes of the employee retention credit.
- Example 2: Corporation B is owned 100 percent by Individual G. Individual H is the child of Individual G. Corporation B is an eligible employer with respect to the first calendar quarter of 2021. Individual G is an employee of Corporation B, but Individual H is not. Individual H is attributed 100 percent ownership of Corporation B, and both Individual G and Individual H are treated as 100 percent owners. Corporation B may not treat as qualified wages any wages paid to Individual G because Individual G is a related individual for purposes of the employee retention credit.
- Example 3: Corporation C is owned 100 percent by Individual J. Corporation C is an eligible employer with respect to the first calendar quarter of 2021. Individual J is married to Individual K, and they have no other family members. Individual J and Individual K are both employees of Corporation C. Individual K is attributed 100 percent ownership of Corporation A, and both Individual J and Individual K are treated as 100 percent owners. However, Individuals J and K do not have any family member relatives. Accordingly, wages paid by Corporation C to Individual J and Individual K in the first calendar quarter of 2021 may be treated as qualified wages if the amounts satisfy the other requirements to be treated as qualified wages.
- Example 4: Corporation D is owned 34 percent by Individual L, 33 percent by Individual M, and 33 percent by Individual N. Individual L, Individual M, and Individual N are siblings. Corporation D is an eligible employer with respect to the first calendar quarter of 2021. Individual L, Individual M, and Individual N are employees of Corporation D. Individual L, Individual M, and Individual N are treated as 100 percent owners Accordingly, Corporation D may not treat as qualified wages any wages paid to Individual L, Individual M, or Individual N.
The IRS interpretation based upon the examples above is too narrowly focused and does not address family business situations when the employee wage paid to the majority owner, spouse and relatives is critical to the operations of the business itself. Without further guidance, the above examples are all we have to follow. Hopefully future guidance in the form of regulations will not follow the IRS interpretation. If you have filed Forms 941 using wages from majority owners and relatives, please contact us to discuss next steps in the process of addressing the IRS interpretation.
Follow Up Note: The Senate $1 trillion bipartisan Infrastructure bill currently being debated would end the employee retention credit for wages paid after September 30, 2021 except for wages paid by Recovery Startup businesses which would extend to the end of 2021.