The IRS Notice 2021-23 expands on the previous Employee Retention Credit (ERC) and is retroactive to January 1, 2021. It’s available to eligible employers for wages paid through the third and fourth quarters of 2021.
“Employers can access the ERC prior to filing their employment tax returns by reducing employment tax deposits,” says the Internal Revenue Service. “Small employers (i.e., employers with an average of 500 or fewer full-time employees in 2019) may request advance payment of the credit on Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits.”
The Notice outlines several upgrades eligible employers can now claim when filing their quarterly taxes, such as the:
- Increase in the maximum credit amount from 50% to 70%;
- Employer category expansion for those eligible to claim the credit, including colleges and universities, plus entities that provide hospital or medical care, and to certain organizations chartered by Congress;
- Modifications to the gross receipts test to 80% and how the decline in gross receipts are calculated (i.e., beginning in 2021, did your business have more than a 20% drop in gross receipts as compared to the same quarter of 2019);
- Calculation of qualified wages using the revised definitions of small and large eligible employers;
- New restrictions on the ability to request an advance payment to certain small, eligible employers with fewer than 500 employees, including seasonal employers and part-time employees, and employers not in existence in 2019;
- Large employer definition changed from more than 100 to more than 500 employees in 2021, which allows a broader definition of qualified wages. In short, you can count wages paid to both active (working) employees and those not providing services.
- Removes the limit on qualified wages defined as no more than the employee would have received in the 30 days before the qualifying period. For example, you can now claim the credit if you pay a bonus to an essential worker.
6 Key Takeaways
Eligible employers can benefit in many ways from the recently-announced revisions, including:
- A refundable credit of up to $5,000 for each full-time equivalent employee you retained between March 13 and Dec. 31, 2020, and up to $14,000 for each, retained employee between Jan. 1 and June 30, 2021.
- A refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages you pay to employees after Dec. 31, 2020, through June 30, 2021.
- If you were not in business in 2019, you could use the corresponding quarters from 2020.
- Claiming the credit immediately by reducing payroll taxes sent to the IRS. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021.
- If your credits exceed payroll taxes, you can request a direct refund from the IRS.
- Allowing employers who received Paycheck Protection Program (PPP) loans to claim the credit for qualified wages not treated as payroll costs in obtaining forgiveness of the PPP loan, which is now retroactive to March 27, 2020.
There are many changes Notice 2021-23 specifies for employers and it can be confusing. Rather than tackling this on your own, call us. We can help you determine what your ERC will be for your specific situation.