The Internal Revenue Service (IRS) has issued an update to its March 2021 guidance. This update, Notice 2021-23, amplifies the March guidance with respect to the Employee Retention Credit (ERC) under Section 2301 of the CARES Act which was amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which enhanced rules and extended the credit to June 30, 2021.
With the enactment of the American Rescue Plan, the ERC has now been extended for wages paid after June 30, 2021 through December 31, 2021. IRS guidance on wages paid July 1, 2021 to December 31, 2021 is pending. We encourage you to review the entirety of Notice 2021-23 but below are the key highlights:
Expansion of Eligible Employers
Under the IRS guidance, governmental entities are not eligible for the ERC; however, any governmental entities that are colleges or universities or provide medical or hospital care may now be eligible employers for the first and second calendar quarters of 2021, assuming they satisfy other requirements to be eligible employers.
Decline in Gross Receipts
Additionally, an employer is an eligible employer with respect to any calendar quarter for which its gross receipts for the calendar quarter are less than 80% of its gross receipts for the same calendar quarter in 2019. Therefore, for purposes of the employee retention credit for the first and second calendar quarters of 2021, the determination of whether an employer is an eligible employer based on a decline in gross receipts is made separately for each calendar quarter and is based on an 80% threshold.
Maximum Amount of Employee Retention Credit
For the first and second calendar quarters of 2021, the employee retention credit equals 70% of qualified wages (including allocable qualified health plan expenses) that an eligible employer pays in a calendar quarter. The amount of qualified wages (including allocable qualified health plan expenses) with respect to any employee that may be taken into account is limited to $10,000 for any calendar quarter; thus, the maximum credit for qualified wages (including allocable qualified health plan expenses) paid to an employee is $7,000 for each of the first and second calendar quarters in 2021 (for a total of $14,000).
Large eligible employers are eligible employers for which the average number of full-time employees during 2019 was greater than 500. Small eligible employers are eligible employers for which the average number of full-time employees during 2019 was not greater than 500. Notice 2021-20 described the rule that for large eligible employers, qualified wages paid to an employee were not to exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the commencement of the full or partial suspension of business or the first day of the calendar quarter in which the employer experienced a significant decline in gross receipts. However, this limitation on qualified wages paid during the first and second calendar quarters of 2021 has now been removed.
Notice 2021-20 stated an employee would not be included for purposes of computing the ERC for any period that an employer is allowed a work opportunity credit with respect to that employee. This restriction has now been removed and this does not apply to employee retention credits claimed for the first and second calendar quarters of 2021.
Claiming the Employee Retention Credit
Small eligible employers may elect to receive an advance payment of the ERC in an amount not to exceed 70% of the average quarterly wages paid in calendar year 2019 (the 70% advance rule). The requirement to reduce deposits in anticipation of the credit before requesting an advance continues to apply to 2021 small eligible employers.
If you have any questions regarding the guidance and how it relates to your organization, please contact us.