The IRS has issued guidance for employers claiming the Employee Retention Credit for the first two calendar quarters of 2021. The American Rescue Plan of 2021 allows eligible employers to claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages paid to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021 with a maximum credit of $7,000 per employee per calendar quarter, for a total of $14,000 for the first two calendar quarters of 2021.
After June 30, 2021, the credit is available but only allowable against the Medicare hospital insurance tax for the last two quarters of 2021. The IRS will provide more details on the extended credit for the last two quarters in future guidance.
Notice 2021-23 explains the changes to the Employee Retention Credit only for the first two calendar quarters of 2021, in the following areas:
The category of eligible employers is expanded to include government entities that are colleges or universities or whose principal purpose or function is providing medical or hospital care.
Gross Receipts Test
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 a decline in gross receipts of 80% for the same calendar quarter in 2019. If an employer was not in existence for the quarter to be measured from 2019, the employer compares gross receipts based on 2020 quarters, with some alternative measures allowed.
Maximum Credit Allowed
The credit equals 70% of qualified wages (including allocable health plan expenses) that an employer pays in a calendar quarter up to $10,000 in wages per employee per quarter. Thus, the maximum credit is $7,000 for each of the first and second calendar quarters in 2021 (for a total of $14,000) per employee.
The definition of qualified wages depends on the size of the 2021 eligible employer. For employers with an average number of full-time employees greater than 500 in 2019, qualified wages are wages paid to an employee for the time the employee is not providing services due to either (1) a full or partial suspension of an employer’s business operations due to a governmental order, or (2) the business experiencing a significant decline in gross receipts. For employers with 500 or fewer full-time employees, qualified wages includes all wages paid during times of full or partial suspension of operations and when there is a significant decline in gross receipts.
One positive change is that a limitation measuring qualified wages against previous pay periods does not apply to 2021 wages. Under that rule, qualified wages may not exceed what an employee would have been paid for working during the 30 days immediately preceding an operations suspension or decline in gross receipts. This restriction was lifted for 2021.
Finally, the rule that denies the credit for employers that claims a work opportunity credit for covered employees does not apply to the first two quarters of 2021.
Employers can get advance payment of the credit for the 1st and 2nd calendar quarters 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 of Employer Credits Due to Covid-19, after reducing deposits. In 2021, advances are not available for larger employers.
Overall, the new guidance is favorable and expands access to the credit for the first two quarters of 2021. Frazier & Deeter’s tax professionals can help ensure you get the maximum employee retention credit available.