October 29, 2021
The IRS continues to issue guidance on the employee retention credit, a credit that was adopted in March 2020. The credit 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.
In Notice 2021-20, the IRS issued detailed guidance for employers claiming the employee retention credit for calendar quarters in 2020. For 2020, eligible employers that received a PPP loan are permitted to claim the employee retention credit, although the same wages cannot be counted for both. The notice also explains:
- Who are eligible employers.
- What constitutes full or partial suspension of trade or business operations.
- What is a significant decline in gross receipts.
- What is the maximum amount of an eligible employer’s employee retention credit.
- The definition of qualified wages.
- How an eligible employer claims the employee retention credit.
- How an eligible employer substantiates the claim for the credit.
The IRS explained the changes for the first two calendar quarters of 2021 in Notice 2021-23, which expands on Notice 2021-20. These include:
- Increasing the maximum credit amount from 50% to 70%.
- Expanding the category of employers that may be eligible to claim the credit to include colleges and universities and entities that provide hospital or medical care.
- Modifying the gross receipts test threshold to 80% and changing how the decline in gross receipts is calculated.
- Revising definitions in the calculation of qualified wages of small and large eligible employers are used.
- Restricting the ability to request an advance payment of the credit to certain small eligible employers with not greater than 500 employees.
As a result of the changes made by the Consolidated Appropriations Act, eligible employers can 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 Dec. 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. The maximum ERC available is $7,000 per employee per calendar quarter, for a total of $14,000 for the first two calendar quarters of 2021.
Notice 2021-49, expands on the rules set out in Notices 2021-20 and 2021-23 and will continue to apply to the third and fourth calendar quarters of 2021.
Under the new notice, an ERC may be claimed by an eligible employer for qualified wages paid in the third and fourth calendar quarters of 2021. An eligible employer is an employer:
- Whose operation is fully or partially suspended due to orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19.
- That experiences a decline in gross receipts (as defined in Notices 2021-20 and 2021-23)
- Is a recovery startup business.
A recovery startup business is an employer:
- Not otherwise an eligible employer under conditions listed above.
- Began carrying on a trade or business after Feb. 15, 2020.
- Has average annual gross receipts for the three tax years preceding the quarter in which it claims the credit of no more than $1 million (with rules under Sec. 448(c)(3) for their calculation if the entity has not been in existence for three years and by reference to the entity’s predecessor).
One change under the ARPA rules for the ERC under Sec. 3134 is that, for the third and fourth quarters of 2021, eligible employers claim the credit against the employer’s share of Medicare tax (or equivalent portion of Tier 1 tax under the Railroad Retirement Tax Act) rather than, as previously, against the employer’s share of Social Security tax (or its equivalent Railroad Retirement Tax Act portion).
Although the limit on the maximum ERC in the first half of 2021 of 70% of up to $10,000 of an employee’s qualified wages per calendar quarter (i.e., $7,000) continues to apply to the third and fourth calendar quarters of 2021, the notice notes that a separate credit limit of $50,000 per calendar quarter applies to recovery startup businesses (after application of the $10,000 wage limit).