On April 2, 2021, the IRS issued Notice 2021-23, Guidance on the Employee Retention Credit under the CARES Act for the First and Second Calendar Quarters of 2021. The Notice 2021-23 expands on the IRS’s guidance issued on the Employee Retention Credit (ERC) in Notice 2021-20 on March 1st.
Maximum Credit Amount
Eligible employers may claim a refundable tax credit against their share of Social Security tax equal to 70% of qualified wages paid to employees after December 31, 2020, and through June 30, 2021. Qualified wages for 2021 are limited to $10,000 per employee per calendar quarter, meaning the maximum ERC is $7,000 per employee per quarter ($14,000 per employee for the first two calendar quarters of 2021).
For the purpose of claiming the 2021 ERC, small employers are those that employed an average of 500 or fewer full-time employees in 2019. Large employers are those that employed more than 500 full-time employees in 2019. To determine full-time employees for ERC purposes, include only employees with an average of at least 30 hours of service per week or 130 hours of service in the month in any calendar month in 2019. Aggregation rules apply for determining employee counts and eligible wages.
Calculating Gross Receipts
Eligible employers must demonstrate a reduction in gross receipts of at least 20% in either the first quarter or second quarter of 2021 compared to the same quarter of 2019. A reduction in gross receipts of at least 20% in the fourth quarter of 2020 compared to the fourth quarter of 2019 would also qualify for the ERC for the first quarter of 2021. Similarly, a reduction in gross receipts of at least 20% in the first quarter of 2021 compared to the first quarter of 2019 would qualify for the ERC for the second quarter of 2021. These elections appear to be independent by quarter, meaning if you choose to use the prior quarter election for the first quarter of 2021, you do not need to use the prior quarter election for the second quarter of 2021.
Reducing Employment Tax Deposits & Advance Payments
Eligible employers can access the ERC for the first and second calendar quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits. Small eligible employers can elect to receive an advance payment of the credit (not to exceed 70% of the average quarterly wages paid in 2019) on Form 7200, Advance of Employer Credits Due to Covid-19, only after they have reduced their tax deposits. Large employers (500+) cannot elect to receive an advance payment of the credit.
Additional Information & Resources
The American Rescue Plan Act of 2021 (ARP) extended the ERC to eligible employers for wages paid during the third and fourth quarters of 2021. The IRS will provide further guidance on the ERC for the last two calendar quarters of 2021.
IRS’s Employee Retention Credit FAQ Webpage
Recent ARB Insights:
IRS Guidance & Resources for Claiming the Employee Retention Credit
American Rescue Plan Act of 2021: What Business Taxpayers Need to Know
Congress Passes the PPP Extension Act of 2021
If you have questions, contact me today. Visit our COVID-19 Financial Resource and Tax Center for information on related matters.
by Holly Ferguson, CPA
Holly Ferguson joined ARB in 1996 and has been a principal for the firm since 2012. Throughout her career, Holly has provided financial reporting consulting services, assisted with transactional accounting and consulting related to business acquisitions/sales, and analyzed implications and strategic implementation of new accounting standards. As the Practice Leader of ARB’s Accounting & Attest Services Team, she focuses primarily on related services for businesses, manufacturers, credit unions, and nonprofit organizations.