IRS Issues Guidance on the 2021 Employee Retention Credit

For Atlanta businesses substantially affected by COVID-19, the employee retention credit (ERC) has been one of the more valuable incentives to keep workers on the payroll. Since its inception in March 2020, the ERC has undergone several modifications and extensions which has increased the credit’s value. There was an initial extension for the first half of the year in the Consolidated Appropriations Act, 2021, (CAA) and then another through the end of the year in the American Rescue Plan Act. The changes are meant to provide additional relief to businesses challenged by the pandemic. However, many have been unable to move forward because of a lack of formal guidance by the IRS. The good news is earlier this month the IRS published Notice 2021-23 which provides important details for claiming the credit in 2021. The guidance applies only to changes made under the CAA and not others enacted later. To help clients, prospects, and others, Wilson Lewis has provided a summary comparison of the changes below.

2021 ERC Guidance Highlights

• Increased Credit Maximum – The guidance confirms the maximum credit amount has been expanded to 70% of qualified wages up to $10,000 per quarter, for a per employee maximum of $14,000 for the first half of 2021. This is an increase over the previous maximum of $10,000 per employee, per year.
• Expanded Access – Additional entities are now eligible to apply including certain governmental entities such as colleges, universities, hospitals, or medical care facilities. In order to qualify, these businesses must have experienced a full, or partial, suspension of operations due to COVID-19, or, had more than 20% reductions in gross receipts in any 2021 quarter when compared against the same timeframe in 2019.
• Gross Receipts Threshold – Under prior regulations a business must have incurred at least a 50% reduction in gross receipts. However, this changed and allows a business that had a reduction in gross receipts for the first or second quarter of 2021 of less than 80% when compared against the same 2019 calendar quarter. In addition, an alternate quarter may be used for comparison to meet the threshold amount. Using this approach, a business may also use the immediately preceding calendar quarter in 2021 by comparing gross receipts to the same time frame in 2019. For example, for the first quarter of 2021, a business may use fourth quarter of 2020 data in the comparison when determining eligibility.
• Definition of Large Employer – The guidance changed the definition of a large employer to mean any employer with an average of 500 employees in 2019. This is an important modification because, under prior rules, any business with 100 or more employees could only count qualified wages as those paid to employees when not providing services due to pandemic-related shutdowns. This means more employers will be able to claim wages for those providing services during a shutdown.
• ERC Advance – Under prior rules there were no restrictions governing which employers could claim an advance on the credit nor a maximum amount that could be requested. However, the guidance changes that and now restricts those with 500 or more full-time employees in 2019 from claiming an advance payment. Small employers are still permitted to request the advance, but the total amount may not exceed more than 70% of the 2019 average quarterly wages paid.

Contact Us

Remember the guidance applies only to the changes made under the CAA and not the more recent American Rescue Plan. As a result, it is expected the IRS will issue additional guidance for claiming the credit in the second half of the year. If you have questions about the information outlined above or need assistance calculating and claiming the credit, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.