As summarized in previous alerts, the Employee Retention Credit (ERC) is available to eligible employers who experienced full or partial suspension of their operations or a significant decline in gross receipts while continuing to pay qualified wages to employees. Initially only available for 2020, the ERC has been made available until the end of 2021.
In Notice 2021-23, the IRS has issued guidance to supplement previously published information on the ERC. The notice provides guidance on changes made to the ERC only for the first two calendar quarters of 2021. The IRS will address changes made to the ERC by the American Rescue Plan Act of 2021 in future guidance. A summary of the more important items addressed in the notice appears below.
Previously not available to the federal or any state government or government agency, the ERC has been amended and now provides an exception for any governmental entity that is a college or university or whose principal purpose or function is providing medical or hospital care. These entities may be considered eligible employers for the first and second quarter of 2021, assuming they satisfy the other requirements.
For 2020, an employer must have experienced a decline in gross receipts as determined by identifying the first calendar quarter in 2020 in which the gross receipts were less than 50 percent of the gross receipts for the same calendar quarter in 2019. By contrast, for 2021, an employer must experience gross receipts of less than 80 percent as compared to the same calendar quarter in 2019. If an employer was not in existence in 2019, it can compare its gross receipts in 2021 to the same calendar quarter of 2020 to determine if the test is met.
Employers may elect to use an alternative quarter to calculate their gross receipts. Under the available election, an employer can determine if the decline in gross receipts is sufficient for the first or second calendar quarter of 2021 by comparing it to the immediately preceding calendar quarter with the corresponding calendar quarter of that quarter in 2019. For example, for the first calendar quarter in 2021, an employer may elect to use its gross receipts for the fourth quarter in 2020 as compared to the fourth quarter in 2019.
The notice states that the employer must maintain documentation to support its determination of the decline in gross receipts, including the calendar quarter it elects to use in measuring the decline.
For the first and second quarters of 2021, the ERC equals 70 percent of qualified wages that an eligible employer pays in a calendar quarter, limited to $10,000 per employee. Thus, the maximum credit for qualified wages paid to an employee is $7,000 for each of the first and second quarter of 2021 (for a total of $14,000).
Employers may access the ERC for the first and second quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits in anticipation of the receiving the ERC. Small eligible employers (i.e., employers with 500 or fewer employees in 2019) may elect to receive an advance payment of their 2021 ERC in an amount not to exceed 70 percent of the average quarterly wages paid in the calendar year 2019. Average quarterly wages generally means the average wages or compensation, both determined without regard to the social security wage base, paid in each calendar quarter in 2019. Advance payments are claimed by filing Form 7200.
Small eligible employers that come into existence in 2021 are not eligible to receive advance payment of the ERC. However, they may reduce their deposits of employment taxes in anticipation of claiming the ERC.
The notice explains that small eligible employers who are eligible to receive an advance payment and who file Form 941 can determine their average quarterly wages for purposes of the advance payment by averaging the amount to be reported on Line 5c on all Forms 941 required to be filed for all wages in 2019. For those small eligible employers who file an annual employment tax return, average quarterly wages can be calculated by dividing the amount to be reported on the following lines and forms, as applicable, by four:
- Line 4 on the 2019 Form 943
- Line 4c on the 2019 Form 944
- The sum of the amounts in the “Compensation” columns of Line 2 and Line 9 on the 2019 Form CT-1
If you have any questions regarding the content of this alert, please contact Danielle Katz, associate, at dkatz@barclaydamon.com; Gerry Stack, Tax Practice Area co-chair, at gstack@barclaydamon.com; Nick Scarfone, Tax Practice Area co-chair, at nscarfone@barclaydamon.com; or another member of the firm’s Tax Practice Area.
We also have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates related to COVID-19 and who are prepared to assist clients. Please contact Yvonne Hennessey, COVID-19 Response Team leader, at yhennessey@barclaydamon.com or another member of the COVID-19 Response Team at COVID-10ResponseTeam@barclaydamon.com.