Guidelines for the 2021 Employee Retention Credit
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For New Jersey and Pennsylvania-area businesses substantially affected by COVID-19, the Employee Retention Credit (ERC) has been a valuable incentive to keep employees on the payroll. Since it was introduced in March 2020 as part of the CARES Act, the ERC has undergone several modifications and extensions, including those made in the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) and again in March 2021 under the American Rescue Plan Act.
Taxpayers finding it difficult to keep up with the changing rules can now look to new IRS guidance, Notice 2021-23 when evaluating eligibility and determining the credit amount. The information contained impacts only the first two quarters of the year and outlines several important changes. To help clients, prospects, and others, Klatzkin has provided a summary of the key details below.
IRS ERC Guidance Highlights
Increasing the maximum credit amount from 50 to 70 percent.
- CARES Act: The ERC was limited to 50 percent of qualified wages (including qualified health plan expenses) up to $10,000 annually, for a maximum yearly credit of $5,000 per employee.
- Relief Act: Enhanced and expanded the maximum credit amount to 70 percent of qualified wages up to $10,000 per quarter, for a total credit of up to $14,000 per employee for the first two quarters in 2021.
Expanding access to newly eligible employers.
- CARES Act: The ERC was previously only available to private-sector employers.
- Relief Act: Exceptions were made to allow certain governmental entities, including colleges, universities, hospitals, or medical care facilities, access to the ERC. In addition to meeting the trade or business requirement, newly eligible employers must have experienced a full or partial suspension in operations due to COVID-19 or had more than a 20 percent drop in gross receipts in any 2021 quarter compared to 2019. If the employer didn’t exist during that quarter in 2019, the same quarter in 2020 could be substituted.
Modifying the threshold for the gross receipts test and changing how to calculate the decline in gross receipts.
- CARES Act: To qualify for the ERC, businesses must have experienced at least a 50 percent decline in gross receipts in any quarter in 2020 compared to the same period in 2019.
- Relief Act: To qualify for the ERC, gross receipts in the first or second quarter of 2021 must be less than 80 percent of gross receipts for the same quarter in 2019. This determination is made each quarter separately. Other changes include permitting the use of an alternative quarter. For example, to determine if the requirements for Q1 2021 are met, an employer can elect to compare Q4 2020 with Q4 2019.
Redefining small and large eligible employers when calculating qualified wages.
- CARES Act: Determining whether an employer is large or small depends on the average number of full-time employees in 2019. If this number is greater than 100, then qualified wages are paid when the employee is not providing services due to either a shutdown or a significant decline in gross receipts. If this number is less than 100, qualified wages are those paid regardless of whether the employee is working or not during any quarter in which the employer experiences a significant decline in gross receipts. Qualified wages cannot be more than what the employee would have been paid in the 30 days preceding the full or partial shutdown or the first day of the quarter in which gross receipts declined.
- Relief Act: The threshold for what is considered a large employer increased to an average of 500 full-time employees in 2019. The previous rule limiting qualified wages based on the preceding 30-day period does not apply. Further, qualified wages include any remuneration for employment.
Restricting access to claim advance ERC payments.
- CARES Act: No restrictions on which eligible employers may receive an advance payment of the ERC.
- Relief Act: Large employers – under the new definition with the 500 average full-time employees in 2019 – are not permitted to elect an advance ERC payment. Small employers can still request advance payments using Form 7200. The advance cannot be more than 70 percent of average quarterly wages paid in 2019. Contact our office for assistance calculating average quarterly wages if your business is seasonal or did not exist in 2019.
The ERC offers a compelling savings opportunity for New Jersey and Pennsylvania-area businesses impacted by the pandemic. Since the guidance only applies to the first half of 2021, it is expected the IRS will issue additional guidance based on changes made in the American Rescue Plan Act. If you have questions about the information outlined above or need assistance with claiming the ERC, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.
©2021 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and does not constitute accounting, tax, or financial advice. Please consult your advisor concerning your specific situation.