Employee Retention Credit Changes

The IRS previously issued guidance for employers claiming the Employee Retention Credit (ERC), a refundable tax credit based upon qualified wages an eligible employer pays to employees, under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The ERC is available to businesses that have seen revenues decline or had to temporarily shut down their operations due to government orders related to COVID-19.

As originally enacted, the credit was equal to 50% of qualified wages with respect to each employee, and a maximum of $10,000 of qualified wages could be taken into account for each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 13, 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, including those that received a PPP loan.

Guidance for claiming the ERC for the first two calendar quarters of 2021 is provided in IRS Notice 2021-23. As a result of the changes made by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) and the American Rescue Plan Act of 2021 (ARPA), eligible employers can now claim a refundable tax credit equal to 70% of the qualified wages they pay to employees after December 31, 2020, through December 31, 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 maximum credit of $28,000 per employee in 2021. However, guidance for claiming the ERC in Q3 and Q4 of 2021 is not yet available.

The ARPA further extended eligible employers for ERC to include the recovery startup business. A recovery startup business (RSB) generally is an employer that:

• Began operations after February 15, 2020, and
• Has average annual gross receipts of less than or equal to $1 million.

While an RSB can claim the credit without experiencing suspended operations or reduced receipts, they are limited to $50,000 in credits per quarter, for a maximum credit of $100,000 for the year.

The ARPA also provides additional relief for “severely financially distressed employers,” meaning an employer whose gross receipts in 2021 are less than 10% of gross receipts when compared to the same calendar quarter in 2019. A severely financially distressed employer can count any wages paid to an employee during any calendar quarter as qualified wages — regardless of employer size.

Employers should review the eligibility requirements before filing their payroll tax return Form 941 (2nd quarter filings are due July 31, 2021) to take full advantage of these credits, as applicable. An amended payroll tax return (Form 941X) can be filed to claim credits for prior quarters for eligible employers.