There is a lot to keep up with between regular tax regulation updates and the many implications thanks to the ever-changing COVID-19 relief programs. As an employer, it can be hard to stay on top of all the business tax news.
Recently, there have been a number of updates that affect employers, including:
A critical update about Employer Identification Numbers
Transition relief for employers claiming the Work Opportunity Tax Credit
Safe harbor and expanded guidance on the Employee Retention Credit
Don’t stress it! We’ve broken down all the key information business owners need to know to remain compliant and make the most of current tax programs.
Critical Employer Identification Number Update
An Employer Identification Number (EIN) is a tax identification number for businesses and organizations issued by the IRS. Think of it as a Social Security Number for your business.
At the end of July, the IRS urged entities with EINs to update their applications if their responsible party or contact information has changed. The IRS defines the responsible party as the individual or entity who “controls, manages, or directs the applicant entity and the disposition of its funds and assets.”
The responsible party must be an individual, not an entity (unless the organization is a government entity). IRS regulations require EIN holders to update this information within 60 days of any change. You can easily do this by filing a Form 8822-B.
Why is this important?
The IRS needs your accurate information in cases of identity theft or other fraud issues related to your organization’s EIN or business accounts. Without this information, they will not know who to contact about identity theft issues. This means it can take a long time to identify the correct point of contact so they can inquire about suspicious activity.
What do I need to do?
The IRS stated this is a common issue and has ramped up efforts to alert businesses, partnerships, trusts and estates, and other entities that are EIN holders.
In August, they began sending letters to approximately 100,000 EIN holders where it appears the responsible party is outdated. If you received one of these notices or your responsible party has recently changed, be sure to use Form 8822-B to update your information as soon as possible.
Remember, your EIN application must disclose the name and Taxpayer Identification Number (Social Security Number, Individual Taxpayer Identification Number, or EIN) of the true principal officer, general partner, grantor, owner, or trustor.
If your business or organization has closed, close your IRS tax accounts and be sure to cancel your EIN to prevent potential fraud.
Relief for Employers Claiming the Work Opportunity Tax Credit
The IRS recently announced transition relief available to certain employers claiming the Work Opportunity Tax Credit (WOTC). The WOTC is a federal income tax credit available to employers that hire certified members of certain groups specified in the Internal Revenue Code who face significant barriers to employment, including Designated Community Residents or Qualified Summer Youth Employees.
Employers must submit a request to a designated local agency (DLA) to certify that an employee hired between January 1, 2021, and October 8, 2021, is a Designated Community Resident or Qualified Summer Youth Employee. To qualify as either, the employee must have a principal place of residence in an Empowerment Zone where they continuously live.
Additionally, the Empowerment Zone designations initially ended on December 31, 2020, but new legislation extended them to December 31, 2025. The update provides guidance to certain employers who were denied the WOTC due to the termination of Empowerment Zone designations on December 31, 2020, or who received a certification before Empowerment Zone designations were extended.
The WOTC tax credit amount equals a percentage of qualified wages paid in a given tax year to an employee certified by the DLA as a member of one of the groups specified in the law.
Updates for Employers Claiming the Employee Retention Credit
Will you be claiming the Employee Retention Credit (ERC)? Be sure to understand these recent updates to maximize your credit.
ERC Guidance through 2021
The latest guidance issued by the IRS in Notice 2021-49 addresses changes made by the American Rescue Plan Act of 2021 (ARP) to the ERC that apply to the third and fourth quarters of 2021. Key changes include:
Making the credit available to eligible employers that pay qualified wages after June 30, 2021, and before January 1, 2022;
Expanding the definition of eligible employers to include “recovery startup businesses;”
Adjusting the definition of qualified wages for “severely financially distressed employers;” and
Stating that the ERC does not apply to qualified wages taken into account as payroll costs related to 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 under section 5003 of the ARP.
The notice also answers common questions about the ERC for both 2020 and 2021, including:
The definition of a full-time employee and whether that definition includes full-time equivalents.
The treatment of tips as qualified wages and the interaction with the section 45B credit.
The timing of the qualified wages deduction disallowance and whether taxpayers that already filed an income tax return must amend that return after claiming the credit on an adjusted employment tax return.
Whether wages paid to majority owners and their spouses may be treated as qualified wages.
You can find detailed answers and information in the full notice.
How can I claim the ERC?
Employers claim the ERC on their employment tax return, typically Form 941, or adjusted employment tax return, generally Form 941-X. If a reduction in the employer’s employment tax deposits does not cover the credit, certain employers may receive an advance payment from the IRS by submitting Form 7200.
Safe Harbor on Gross Receipts
The government also recently issued a safe harbor allowing employers to exclude certain items from their gross receipts solely to determine the ERC eligibility. These items are:
The amount of forgiveness of a Paycheck Protection Program (PPP) Loan;
Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act; and
Restaurant Revitalization Grants under the American Rescue Plan Act of 2021.
How can I apply the ERC safe harbor?
To apply the safe harbor, exclude these amounts to determine whether you are eligible for a calendar quarter to claim the ERC on your business tax return. You must apply the safe harbor consistently by excluding the amounts from your gross receipts for each calendar quarter in which gross receipts are relevant to ERC eligibility.
You do not have to apply for the safe harbor, and it does not permit the exclusion of the above amounts from gross receipts for any other federal tax purpose.
Hopefully, these simplified highlights reduce some of your stress and help you maximize your tax benefits. Check our blog regularly for important tax and accounting news. If you have any questions about your employer taxes or overall accounting, contact us at 603-505-2368 or schedule a complimentary consultation to find out how we can help you today!