The Infrastructure Investment and Jobs Act is heading to President Biden’s desk to be signed and when it is, it may mean that the Employee Retention Credit will be terminated earlier than the original guidance issued by the IRS.
This means that the infrastructure legislation ends the employee retention credit (ERC) early, making wages paid after Sept. 30, 2021, ineligible for the credit (except for wages paid by an eligible recovery startup business).
While there are not many tax provisions in the infrastructure legislation, (expect more extensive changes coming in a fiscal year 2022) budget reconciliation bill that remains under consideration by Congress. Those would include extensions of recent changes to the child tax credit and the earned income tax credit; an expanded premium tax credit; relief from the $10,000 state and local tax deduction cap; corporate and international tax changes; and limits on the interest expense deduction.
Employee retention credit
The ERC was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and amended by the Consolidated Appropriations Act, 2021, P.L. 116-260. The American Rescue Plan Act, P.L. 117-2, enacted March 11, made the ERC available to eligible employers for wages paid during the third and fourth quarters of 2021; however, H.R. 3684 would repeal the fourth-quarter extension. The IRS issued guidance on claiming the credit in the third and fourth quarters of 2021 (Notice 2021-49), but noted in that guidance that it is watching this legislative development.
The IRS recently provided some additional guidance on claiming the Employee Retention Credit (ERC) which may impact your freelance business for the the third and fourth calendar quarters of 2021.
As a reminder, if you have employees, you are considered an eligible employer for the ERC by the IRS if you engage in “a trade or business (1) whose trade or business’s operation is fully or partially suspended due to orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19; (2) that experiences a decline in gross receipts (as defined in Notices 2021-20 and 2021-23); or (3) is a recovery startup business.”
In the eyes of the IRS, a recovery startup business is an employer that (1) is not otherwise an eligible employer under conditions (1) or (2) noted in the preceding paragraph; that (2) began carrying on a trade or business after Feb. 15, 2020; (3) with average annual gross receipts for the three tax years preceding the quarter in which it claims the credit of no more than $1 million.
The key changes to the ERC under the American Rescue Plan Act (or ARCA) which may impact your freelance business for the third and fourth quarters of 2021, include:
- The ERC availability is now extended from June 30, 2021, until December 31, 2021. (There has been some talk in Congress to suspend the program as of September 30,2021 so stay tuned for updates.)
- The required year-over-year gross receipts is reduced from 50% to 20%;
- A safe harbor is provided that allows employers to use prior quarter gross receipts to determine eligibility;
- Eligible employers can claim the credit against the employer’s share of Medicare tax rather than, as previously stated, against the employer’s share of Social Security tax (or its equivalent Railroad Retirement Tax Act portion).
- It increases the limit on creditable wages from $10,000 in total to $10,000 per calendar quarter (i.e., $10,000 for first quarter 2021 and $10,000 for second quarter 2021);
- A separate credit limit of $50,000 per calendar quarter applies to recovery startup businesses, after application of the $10,000 wage limit. The limit on the maximum ERC in the first half of 2021 of 70% of up to $10,000 of an employee’s qualified wages per calendar quarter (i.e., $7,000) continues to apply to the third and fourth calendar quarters of 2021.
- The new guidance does not specifically indicate that start-up businesses can be eligible employers simply due to being a recovery startup business. Your business must meet the IRS and U.S. Treasury requirements to be considered a recovery startup.
- In addition, the new statute does not specifically state that recovery startup businesses may be treated as small eligible employers (expanding the coverage to those businesses with 500 employees or fewer), the notice provides that Treasury and the IRS have concluded it is appropriate to read the small eligible employer rule of the original ERC guidance as if it applies to recovery startup businesses.
Given some of the complexities related to the ERC for small businesses and particularly businesses that were started during the pandemic it is a good idea to make sure your business is entitled to claim the ERC under both the original and the new updated guidance to avoid any tax issues later on.