The CARES Act created a refundable payroll tax credit called the Employee Retention Credit (ERC) for qualified wages paid by an eligible employer between March 13th and December 31st of 2020. The credit was equal to 50% of qualified wages paid, up to $10,000 in wages paid per employee, with a maximum credit of $5,000 per employee. In December 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA) extended the ERC to qualified wages paid between January 1st and June 30th of 2021. Previous guidance did not address the extension of the ERC into 2021.
New Guidance for 2021 Q1 and Q2
The IRS recently released Notice 2021-23, providing guidance on claiming the ERC for 2021 Q1 and Q2. The notice includes detail on the following changes:
An eligible employer for purposes of claiming an ERC in 2021 is any employer that carries on a trade or business during the quarter for which the credit is claimed. The definition of eligible employers has been expanded to include a governmental agency that is a college or university, and organizations that provide medical or hospital care. To be considered an eligible employer, the organization must have also 1) fully or partially suspended operations during the quarter due to orders from a government authority limiting commerce, travel, or group meetings due to COVID-19, or 2) experienced a significant decline in gross receipts during the quarter (aka the “gross receipts test”).
Gross Receipts Test Modifications
If it is determined that operations were not fully or partially suspended during the quarter, an employer will need to determine if they meet the “gross receipts test” for purposes of being considered an eligible employer for the ERC. The gross receipts test has been modified for 2021 Q1 and Q2 to be determined separately each quarter, based on a threshold of less than 80% of the same quarter in 2019. This means that gross receipts during the 2021 quarter must be less than 80% of what they were in the same quarter in 2019. If the employer did not exist during the same quarter in 2019, the same quarter for 2020 may be used instead.
Alternatively, an employer can determine if they meet the gross receipts test by electing to use the immediately preceding quarter. For example, for determining if the gross receipts test is met in 2021 Q1, the employer may elect to compare 2020 Q4 gross receipts to 2019 Q4 gross receipts.
Increase in Maximum Credit Amount
The maximum credit amount has been increased from $5,000 for all calendar quarters of 2020 combined to $7,000 per quarter. This is calculated as 70% of qualified wages paid during the quarter, with a maximum wage base of $10,000 per employee. The $7,000 maximum ERC is per quarter, meaning a total maximum ERC of $14,000 for 2021 Q1 and Q2 combined.
How to Claim the Credit
The ERC may be claimed on Form 941 for the quarter that the qualified wages are paid, or Form 944 for employers that use this form. Employers can get the ERC for 2021 Q1 and Q2 before filing their employment tax returns by reducing their employment tax deposits. Small employers may request advance payment of the credit on Form 7200, Advance Payment of Employer Credits Due to COVID-19, after reducing deposits.
Under the American Rescue Plan Act of 2021 the ERC is now also available for 2021 Q3 & Q4; however, guidance for claiming the ERC in 2021 Q3 & Q4 won’t be provided for some time. For 2021, the total ERC can be up to $28,000 per employee.
Interested in seeing if your business qualifies for an ERC? We will be happy to complete an analysis of your specific circumstances and assist in determining your best approach to claiming an ERC. Reach out to us today to schedule a consultation.
Written by: Susan George, CPA
Susan George joined Thompson Greenspon as a Tax Senior in the fall of 2017. Prior to joining the firm, she worked as a Tax Accountant in the construction & real estate group at a large regional public accounting firm in Tysons, VA.
Susan is responsible for the preparation and review of Federal and multi-state tax returns for corporations, partnerships, trusts, estates, nonprofit organizations, and individuals. She has substantial experience serving clients in the construction and real estate industries and nonprofit organizations.
Susan holds a Bachelor of Business Administration from James Madison University and graduated in 2013. Following her graduation, she attended George Mason University where she enrolled in the Accounting Certificate program to become a CPA. Susan has been a licensed CPA in Virginia since 2016. She is a member of the American Institute of Certified Public Accountants and the Virginia Society of Certified Public Accountants.