The IRS has released further guidance (Notice 2021-23) concerning the employee retention credit (“ERC”) claimed by employers for the first and second calendar quarters of 2021 to address the following:
- the expansion of the types of employers that may be eligible to claim the credit,
- modifications to the gross receipts test,
- the increase in the maximum credit amount,
- revisions to the definition of qualified wages, and
- new restrictions on the ability of eligible employers to request an advance payment of the credit.
As a result of the changes made by the Relief Act, for the first two quarters of 2021:
- Eligible employers can now claim a refundable tax credit against the employer share of social security tax equal to 70% of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021.
- Qualified wages are limited to $10,000 per employee per calendar quarter in 2021.
- The maximum employee retention credit available is $7,000 per employee per calendar quarter, for a total of $14,000 for the first two calendar quarters of 2021.
- While the employee retention credit is not available to most governmental employers, it is available to tax-exempt organizations described in Code Section 501(c)(1), and to any governmental entity that is a college or university or whose principal purpose is providing medical or hospital care.
- Whether an employer is an eligible employer based on a decline in gross receipts is determined separately for each calendar quarter, and is now based on an 80 percent threshold compared to the same calendar quarter in 2019.
- Whether wage payments by an eligible employer will be considered qualified wages depend, in part, on the average number of full-time employees an eligible employer employed during 2019. For the first and second calendar quarters of 2021, large eligible employers are those whose average number of full-time employees during 2019 was greater than 500. For these employers, qualified wages are wages paid to an employee for time that the employee is not working for the reasons the credit is allowed.
- Small eligible employers are those whose average number of full-time employees during 2019 was 500 or less. For these employers, qualified wages are the wages paid an employee whether the employee is working or not working for the reasons the credit is allowed.
The IRS has stated that employers can access the ERC for the first and second calendar quarters of 2021 before filing their employment tax returns, by reducing their employment tax deposits. Employers with an average of 500 or fewer full-time employees in 2019 (“small employers”) may request advance payment of the credit after reducing deposits. In 2021, advances are not available for larger employers with over 500 employees. Details are also provided in Notice 2021-23 about how to calculate and claim the employee retention credit for the first two calendar quarters of 2021.
The IRS release concludes that the American Rescue Plan Act of 2021 (enacted March 11, 2021) will make the employee retention credit available to eligible employers for wages paid during the third and fourth quarters of 2021. The IRS stated it will provide additional guidance about the employee retention credit that is available for these calendar quarters.
We will issue additional Alerts as further guidance becomes available. Your LMC professional is available if you have questions related to the latest updates on this topic.