IRS Issues Guidance on Employee Retention Credit for First Half of 2021
Initially created in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act, the employee retention credit (ERC) has been extended and expanded in recent months – first by the Consolidated Appropriations Act, 2021, and then by the American Rescue Plan Act of 2021. The IRS continues to release guidance to explain how businesses can apply the powerful tax credit based on these legislative changes. On April 2, 2021, the IRS issued Notice 2021-23, providing additional clarification regarding the ERC for the first and second calendar quarters of 2021.
Notice 2021-23 is relatively short, and it amplifies the guidance previously provided by Notice 2021-20 regarding the retroactive ERC for 2020. It also largely confirms that the general principles and mechanics governing the 2020 ERC will apply to the ERC for the first and second quarters of 2021. However, there are a few key takeaways to consider from Notice 2021-23:
- The average number of full-time employees for 2019 is calculated by counting the number of employees who had an average of at least 30 hours of service per week or 130 hours of service in the month.
- When opting to use the prior quarter in determining a decline in gross receipts, the election is simply made by claiming the ERC for the quarter based on proper documentation maintained in the employer’s records to support eligibility based on a decline in gross receipts for such prior quarter.
- Small employers (i.e., less than 500 full-time employees) can claim advanced payments of the ERC up to 70% of the average quarterly wages paid in calendar year 2019. The determination of average quarterly wages is based on the quarterly wages paid by all members of the aggregated group and is determined by reference to Line 5c of the quarterly Form 941 filings. The notice also provides rules for determining the 70% advance rule for employers that were not in existence for all of 2019.
- The notice provides guidance in determining which government entities are potentially eligible for the 2021 ERC via the trade or business exception provided to any government entity that is a college, university, hospital, or medical provider.
The ERC was extended by the American Rescue Plan Act of 2021 to include the third and fourth calendar quarters of 2021. Notice 2021-23 does not address the ERC for these quarters; however, the notice does indicate that future guidance will be issued to address special rules applicable to the third and fourth quarters of 2021.
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We will continue to monitor the evolution of the ERC program and will keep you apprised of changes and updates to this and other COVID-19-related legislation. If you need help determining ERC eligibility, please reach out to your KSM advisor or complete this form.
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