Can An Eligible Common Law Employer That Uses A Third-Party To Report And Pay Employment Taxes To The IRS Get The Employee Retention Credit? – #62 ERC IRS Notice 2021-20

November 2, 2022

Question #62:
Can an eligible common law employer that uses a third-party to report and pay employment taxes to the IRS get the employee retention credit?

Found under the M. Special Issues for Employers: Use of Third-Party Payers section of the Employee Retention Credit (ERC) IRS Notice 2021-20 with updated guidance to help business owners follow the current ERC rules. 

The answer to question #62, Can an eligible common law employer that uses a third-party to report and pay employment taxes to the IRS get the employee retention credit?, can be found below.

ERC IRS Notice 2021-20 Question #62:

M. Special Issues for Employers: Use of Third-Party Payers

Can an eligible common law employer that uses a third-party to report and pay employment taxes to the IRS get the employee retention credit?

Yes. If a common law employer is otherwise eligible to receive the employee retention credit, it is entitled to the credit, regardless of whether it uses a third-party payer (such as a reporting agent, payroll service provider, PEO, CPEO, or

3504 agent) to report and pay its federal employment taxes. The third-party payer is not entitled to the employee retention credit with respect to the wages it remits on the common law employer’s behalf (regardless of whether the third-party is considered an “employer” for other purposes of the Code). If a common law employer uses a third- party to file, report, and pay employment taxes, different rules will apply depending on the type of third-party payer the common law employer uses for claiming/reporting the employee retention credit.

If an eligible common law employer uses a reporting agent to file its federal employment tax returns, the reporting agent will need to reflect the employee retention credit on the federal employment tax returns it files on the common law employer’s behalf.

If an eligible common law employer uses a CPEO or a 3504 agent that received its designation as an agent by submitting Form 2678, Employer/Payer Appointment of Agent, to report its federal employment taxes on an aggregate Form 941, the CPEO or 3504 agent will report the employee retention credit on its aggregate Form 941 and Schedule R, Allocation Schedule for Aggregate Form 941 Filers, that it already files. An eligible common law employer can submit its own Form 7200 to claim the advance payment of the credit. The eligible common law employer will need to provide a copy of the Form 7200 to the CPEO or 3504 agent so the CPEO or 3504 agent can properly report the employee retention credit on the Form 941.

If an eligible common law employer uses a non-certified PEO or other third-party payer (other than a CPEO or section 3504 agent that submitted Form 2678) that reports and pays the common law employer client’s federal employment taxes under the third- party’s Employer Identification Number (EIN), the PEO or other third-party payer will need to report the employee retention credit on an aggregate Form 941 and separately report the employee retention credit allocable to the common law employers for which it is filing the aggregate Form 941 on an accompanying Schedule R.

 The PEO or other third-party payer does not have to complete Schedule R with respect to any common law employer for which it is not claiming an employee retention credit. The eligible common law employer will need to provide a copy of any Form 7200 that it submitted for an advance payment of the credit to the PEO or other third-party payer so the PEO or other third-party payer can properly report the employee retention credit on the Form 941. These rules are similar to the rules that apply with respect to the payroll tax election available under section 41(h) of the Code for the credit for certain research and development expenses.

For more information about the Employee Retention Credit (ERC) IRS Notice 2021-20, visit the Internal Revenue Service (IRS) Department of the Treasury, official IRS.gov tax website.

Conclusion and Summary on Can an eligible common law employer that uses a third-party to report and pay employment taxes to the IRS get the employee retention credit? – #62 ERC IRS Notice 2021-20

The answer to Question #62: “Can an eligible common law employer that uses a third-party to report and pay employment taxes to the IRS get the employee retention credit?” was answered in detail above. It was found under section “M. Special Issues for Employers: Use of Third-Party Payers” in IRS Notice 2021-20. 

Leave a comment below if you have further questions on the Employee Retention Credit (ERC) or for clarifications on Can an eligible common law employer that uses a third-party to report and pay employment taxes to the IRS get the employee retention credit?

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Cover Image Credit: Irs.gov / IRS Notice 2021-20 / Disaster Loan Advisors.

Mark Monroe
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