The IRS recently issued guidance for employers claiming the Employee Retention Credit (ERC) under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). As a reminder, the ERC is a refundable tax credit against certain employment taxes of the qualified wages an eligible employer pays to employees.
As originally enacted, the credit was equal to 50% of qualified wages with respect to each employee, and a maximum of $10,000 of qualified wages could be taken into account for each employee for wages paid from March 12, 2020 through December 31, 2020. Additionally, employers that received a Paycheck Protection Program (PPP) loan were ineligible to claim the credit. However, substantial changes have been made to the credit which have resulted in many more employers being eligible, and the elimination of the PPP loan exception.
Details of the changes for the first two calendar quarters of 2021 are explained in Notice 2021-23. Included in this notice are details for changes to:
- the increase in the maximum credit amount,
- the expansion of the category of employers that may be eligible to claim the credit,
- modifications to the gross receipts test,
- revisions to the definition of qualified wages, and
- new restrictions on the ability of eligible employers to request an advance payment of the credit.
As a result of the changes made by the COVID-Related Tax Relief Act of 2020 (Relief Act), eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum employee retention credit available is $7,000 per employee per calendar quarter, for a total of $14,000 for the first two calendar quarters of 2021.
With these changes, the amount of the credit can be significant. Employers should review the eligibility requirements before filing their payroll tax return 941 (1st quarter filings due April 30, 2021) to take full advantage of these changes. If employers have already filed for the 1st quarter, an amended payroll tax return (941x) can be filed.
Under the American Rescue Plan Act of 2021 (ARPA), enacted March 11, 2021, the ERC is available to eligible employers for wages paid during the third and fourth quarters of 2021. The Department of the Treasury and the IRS will provide further guidance on the ERC available under the ARPA.