The American Rescue Plan Act of 2021, enacted in March of this year, further extended the availability of the ERC to eligible employers for wages paid during the third and fourth quarters of 2021. Additional guidance on this most recent enhancement of the ERC is expected from the IRS at a later time.
The IRS has issued a series of notices providing guidance for employers claiming the employee retention credit (ERC) in 2021. The credit was originally created as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, then extended and modified by the Taxpayer Certainty and Disaster Tax Relief Act of 2020.
For a more in-depth insight, check out our podcast on the expanded ERC.
In March, the IRS more clearly defined ERC eligibility and explained how the ERC and Paycheck Protection Program work in tandem. Notice 2021-23, released in early April, explains the changes for the first and second calendar quarters of 2021, including:
- The increase in the maximum credit amount
- The expansion of the category of employers that may be eligible to claim the credit
- Modifications to the gross receipts test
- Revisions to the definition of “qualified wages”
- New restrictions on the ability of eligible employers to request an advance payment of the credit
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 was enacted in late December of 2020, enabling eligible employers to claim a refundable tax credit against the employer’s share of Social Security tax. The ERC is equal to 70% of the qualified wages paid to employees after December 31, 2020, through December 31, 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.
Effective January 1, 2021, eligible employers include those that operated trade or business between January 1, 2021, and December 31, 2021, and experience either of the following:
- A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel, or group meetings due to COVID-19.
- A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020, the gross receipts were required to be less than 50%).
Employers that did not exist in 2019 can use the corresponding quarter in 2020 to measure the decline in their gross receipts. In addition, for all calendar quarters in 2021, employers may elect in a manner provided in future IRS guidance to measure the decline in their gross receipts using the immediately preceding calendar quarter (i.e., the fourth calendar quarter of 2020 and first calendar quarter of 2021, respectively) compared to the same calendar quarter in 2019.
Eligible employers can get the ERC for all of 2021 before filing their employment tax returns by reducing employment tax deposits. Small employers (i.e., employers with an average of 500 or fewer full-time employees in 2019) may request advance payment of the credit (subject to certain limits) on Form 7200, Advance Payment of Employer Credits Due to Covid-19, after reducing deposits. In 2021, advances are not available to employers that averaged 500 or more employees.
Additional instructions on how to calculate and claim the ERC for the first two calendar quarters of 2021 are available in Notice 2021-23.
With these new guidelines, your business may be eligible to receive expanded payroll tax credits. If you have any questions regarding your business’ eligibility and would like to discuss the process of calculating and applying for this credit, please contact your local CRI tax advisor. For more information and guidance, we encourage you to view our QuickHit webcast regarding this recent expansion of the ERC.