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The latest IRS Notice 2021-23 provides additional rules on the Employee Retention Credit (ERC) with respect to quarter one and quarter two of the 2021 tax year.
The new notice supplements IRS Notice 2021-20 and clarifies that under Section 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the period in which the Employee Retention Credit can be obtained was widened to include the first and second quarters of 2021. The notice also expands the pool of employers eligible to qualify for the Employee Retention Credit to include any government entity that is a college, university, or business primarily being used for medical or hospital care.
IRS Notice 2021-23 also reiterates Section 207’s language pertaining to eligibility based on “Significant Decline of Gross Receipts,” which requires employers to have experienced an 80% loss in gross receipts in order to qualify for the Employee Retention Credit for the first or second quarter of 2021. The notice also makes clear how gross receipts are calculated for employers that did not exist during 2019.
In addition, the notice allows employers to use the immediately preceding quarter for comparing to the corresponding quarter in 2019 as an alternative for calculating gross receipts. For example, in quarter one of 2021, employers can elect to use quarter four of 2020 and compare it with quarter four of 2019. Or, for quarter two of 2021, employers can elect to use quarter one of 2021 and compare it to quarter one of 2019 for determining gross receipts.
Finally, the notice provides clarification on the maximum amount per Employee Retention Credit and qualified wages as well as guidance on how to claim the Employee Retention Credit.
The Employee Retention Tax Credit is a refundable tax credit for employers that have suffered financial hardship caused by COVID-19. The Employee Retention Credit applies to “qualified wages” paid to employees and can be claimed by employers that had their operations fully or partially suspended because of the pandemic, or their gross receipts were less than 80% of their gross receipts for previous quarters. The Employee Retention Credit was extended through 2021 as part of President Biden’s $1.9 trillion American Rescue Plan.
For each quarter of 2021, employers may be eligible to receive up to $7,000 in Employee Retention Tax Credits ($10,000 in qualified wages X 70%), allowing for a maximum Employee Retention Credit of $28,000 per employee. Originally, under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, employers could only qualify for the credit for 2020 with a cap of $5,000 per Employee Retention Credit. That was extended by the Taxpayer’s Certainty and Disaster Relief Act of 2020 so that the first two quarters of 2021 were included and the credit was increased to a cap of $7,000 per quarter.
This maximum total of $28,000 per employee for all four quarters of 2021 is available even if the employer received the $5,000 maximum Employee Retention Credit for wages paid to such employees in 2020.
All in all, employers could be eligible for up to $33,000 in Employee Retention Tax Credits per employee for 2020 and 2021.
For 2020, the eligibility restrictions are stricter. Instead of a decline in gross profits of more than 20% as required for 2021, the decline must be more than 50%. The IRS has outlined criteria for determining whether or not an employer qualifies for the Employee Retention Credit. See below to generally see if your business qualifies:
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- The wages you are relying upon for the Employee Retention Credit were not forgiven under a Paycheck Protection Program (PPP) loan
- You employed, on average, at least 100 full-time (FT) employees during 2019 if claiming the 2020 ERTC
- You employed, on average, at least 500 FTs during 2019 if claiming the 2021 ERTC
- Your operations were fully or partially suspended due to a COVID-19 government order
- Your business incurred a decline in gross receipts greater than 50% for 2020
- Your business incurred a decline in gross receipts greater than 20% for 2021
The definition of a full-time employee for purposes of the Employee Retention Credit is an employee who had an average of at least 30 hours of service per week or 130 hours of service in a month as determined under IRC Section 4980H. Employers looking to calculate their full-time count to determine eligibility to obtain Employee Retention Credits for a particular tax year should reference their ACA compliance process for accurate full-time equivalent counts. Under Section 4980H, the IRS has sanctioned only two methods to determine “full-time,” theMonthly Measurement Method and the Look-Back Measurement Method. These methods can be complicated but are required to determine full-time status.
The full-time count for Employee Retention Credit purposes can be coordinated with the full-time count for purposes of the ACA’s Employer Mandate. This is the requirement that employers with 50 or more full-time employees and full-time-equivalent employees, known as ALES, offer Minimum Essential Coverage (MEC) to at least 95% of their full-time employees (and their dependents) as determined by IRC Section 4980H and whereby such coverage meets Minimum Value (MV) and is affordable for the employee or be subject to Internal Revenue Code (IRC) Section 4980H penalties.
If your business is looking to maximize the Employee Retention Credit opportunity, you should refer to ACA compliance experts who have tools established for accurately determining full-time employee counts. Look to vendors that will analyze your workforce from an ACA perspective to ensure your business is maximizing the tax credit savings while minimizing overall IRS risk.
To learn more about the Employee Retention Credit, download our ERC Regulatory Update to see if your business is eligible.
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