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.
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:
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.
Our team can help you navigate these changes, learn more here!
Jonathan Medows is a certified public accountant licensed in New York, New Jersey, Maryland, and Pennsylvania. He is also a recognized expert in taxation for freelancers and the self-employed—often tapped for his expert knowledge and perspective on self-employment taxation by national and regional publications such as The New York Post, BusinessWeek, Forbes taxation blog, WebCPA, CPA Practice Advisor, and others. You can read some of Jonathan’s press coverage here.
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