advocacy

Weekly Legislative Update
May 2, 2022

IRS Reminds Employers of Penalty Relief Related to Claims for the Employee Retention Credit

The Department of the Treasury and the Internal Revenue Service have received requests from taxpayers and their advisors for relief from penalties arising when additional income tax is owed because the deduction for qualified wages is reduced by the amount of a retroactively claimed employee retention tax credit (ERTC), but the taxpayer is unable to pay the additional income tax because the ERTC refund payment has not yet been received.

Treasury and the IRS are aware that this situation may arise, in part, due to the IRS’s backlog in processing adjusted employment tax returns (e.g., Form 941-X) on which the taxpayers claim ERTC retroactively. Based on applicable law, IRS guidance provides that an employer must reduce its income tax deduction for the ERTC qualified wages by the amount of the ERTC for the tax year in which such wages were paid or incurred. Taxpayers that claimed the ERTC retroactively and filed an amended income tax return reducing their deduction for the ERTC qualified wages paid or incurred in the tax year for which the ERTC is retroactively claimed have an increased income tax liability, but may not yet have received their ERTC refund.

This release reminds taxpayers that, consistent with the relief from penalties for failure to timely pay noted in Notice 2021-49, they may be eligible for relief from penalties for failing to pay their taxes if they can show reasonable cause and not willful neglect for the failure to pay.

In general, taxpayers may also qualify for administrative relief from penalties for failing to pay on time under the IRS’s First Time Penalty Abatement program if the taxpayer:

  1. Did not previously have to file a return or had no penalties for the three prior tax years,
  2. Filed all currently required returns or filed an extension of time to file and
  3. Paid, or arranged to pay, any tax due.

For general information, visit the Penalty Relief page on IRS.gov.

Overtime Standards in Virginia Will Return to Federal Standards Beginning July 1, 2022

  • On July 1, 2021, the Virginia Overtime Wage Act (VOWA) went into effect, significantly deviating the state’s overtime pay laws from its long-standing reliance on the standards set forth in the federal Fair Labor Standards Act (FLSA). Exactly one year later, Virginia will return to the overtime standards that applied prior to the VOWA.
  • Generally, the FLSA requires that non-exempt employees be paid overtime at a rate of one and one-half times their “regular rate of pay” for all hours worked in excess of 40 hours in a workweek. Under the FLSA, the regular rate of pay is the sum of an employee’s compensation for a given workweek (barring certain statutory exclusions) divided by the total hours worked by the employee during that workweek. Under the VOWA, if a non-exempt employee was paid on a salary basis, their regular rate of pay was calculated by dividing that same compensation by 40 hours rather than actual hours worked, resulting in a higher regular rate. The new legislation eliminates this difference and returns to the FLSA’s regular rate calculation method entirely.
  • Now that the FLSA’s regular rate calculation standards will again apply, the fluctuating workweek may be used again.
  • Based on the definition of “employee” set forth in the VOWA, arguably some of the FLSA’s exemptions from overtime were no longer available under state law. A return to the FLSA’s standards ensures that all overtime exemptions available under federal law likewise will be available under Virginia law.

Employers should be mindful that the VOWA was not entirely rescinded. Prior to VOWA, employees could assert overtime pay claims only in federal court under the FLSA. VOWA in part enabled employees to alternatively bring such claims in state court, under arguably more employee-friendly state law standards. While those differing standards are eliminated as of July 1, employees may still pursue their overtime claims in state court, whether under state law, federal law, or both.

If employers have any questions or concerns, we recommend they contact us.