On April 2, 2020, the Internal Revenue Service (IRS) announced new guidance for employers claiming the Employee Retention Credit (ERC). Employers may access the ERC for the first and second quarters of 2021 before filing employment tax returns by reducing employment tax deposits.

Notice 2021-23 highlights the changes to the ERC for the first two quarters of 2021 and includes the following updates:

1. Increase in the Maximum Credit Amount from 50% to 70%

  • As a result of the updates created by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, qualifying employers may claim a refundable tax credit against their share of Social Security tax equal to 70% of the eligible wages paid to employees after Dec. 31, 2020, through June 30, 2021. These wages are limited to $10,000 per employee for each quarter in 2021. Consequently, the maximum employee ERC available per employee for each quarter is $7,000, with a total of $14,000 for the first half of 2021.

2. Expansion of ERC-Eligible Employers

  • Tax-exempt educational institutions now qualify for the ERC, including public colleges, universities, elementary schools, secondary schools and governmental entities with the primary purpose of providing medical care. It’s not clear how partial shutdown rules will be applied to these institutions yet, but the IRS is helping these organizations by acknowledging they will now qualify for ERC relief.

3. Changes to Gross Receipts Test Threshold and Calculation

  • The decline in gross receipts threshold is reduced from 50% for 2020’s ERC to 20% for 2021’s ERC. Generally, the reduction in gross receipts is determined by comparing the gross receipts in the first quarter of 2021 to the first quarter of 2019. For the second quarter of 2021, the gross receipts are compared to the second quarter of 2019.
  • If the employer was not in existence in 2019, then the employer can compare their 2021 quarterly gross receipts to the same quarter in 2020 (instead of 2019).
  • The new guidance elaborates on the provision allowing employers to elect to use an alternative quarter to calculate gross receipts (look-back rule). This approach applies the gross receipts numbers from the previous quarter, rather than the current quarter, in showing a more than 20% decline in gross receipts. For example, for the first calendar quarter of 2021, the employer can use the 2020 fourth quarter gross receipts compared to 2019 fourth quarter gross receipts. This election would not be available if the taxpayer was not in existence at the beginning of the 2019 fourth quarter. For the second quarter of 2021, the look-back period would be first quarter 2021 compared to first quarter 2019. Many business owners were concerned the IRS would make the election an all-or-nothing approach, but fortunately, it did not and more businesses can qualify for this relief opportunity.

4. Updates to the Definition of Qualified Wages

  • The amount of qualified wages is based on the monthly average of full-time employees in 2019. Full-time employees for the ERC are employees who had an average of at least 30 hours of service per week or 130 hours of service in the month.
  • If an employer had fewer than 500 employees in 2019, eligible wages include those paid to all employees, even if the employer has more than 500 in 2021.
  • If the employer had more than 500 full-time employees in 2019, qualified wages are wages paid to employees during the time they were not working. The previous threshold was 100 full-time employees for the 2020 ERC.
  • The IRS still has not confirmed whether part-time employees are included in the full-time employee calculation. Including part-time employees in this calculation would drastically affect the 2020 and 2021 ERCs, allowing for many more employees’ wages to be considered. Since there has not been a determination made just yet, part-time employees should not be included in the calculation until further guidance is issued.

5. New Restrictions Limiting Small Businesses to Request Advanced Payment of the ERC

Claiming the Credit

Eligible employers that have no Paycheck Protection Program (PPP) loan or have received their loan forgiveness already should file Form 941-X for each quarter they wish to claim the credit for. If an employer has not received PPP loan forgiveness, a Form 941 should be filed for the fourth quarter of 2020 or a Form 941-X for each quarter claimed.

Guidance suggests to claim the credit for the first and second quarters of 2021, eligible employers should reduce their payroll deposits, including federal income tax withheld from employees, along with both the employee and employer portions of the Social Security and Medicare taxes, and file a Form 941 for each applicable quarter.

More Guidance to Come

While President Biden’s American Rescue Plan Act (ARPA) makes the ERC available to qualifying employers for wages paid in the third and fourth quarters of 2021, there is more information to come from both the IRS and the Department of the Treasury. In the meantime, if you need assistance calculating or claiming the ERC for the first half of 2021, contact Doeren Mayhew’s tax advisors today.