On April 2, 2021, the Internal Revenue Service (IRS) issued a second Employee Retention Credit (ERC) notice. Notice 2021-23 follows Notice 2021-20 and provides employers with information on claiming credit for the first and second quarters in 2021.

Congress first introduced the ERC within the CARES Act on March 27, 2020. The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, made several changes to and extended the ERC. On March 11, 2021, the American Rescue Plan Act prolonged the ERC again. As a result of the legislation, the credit employers can claim increased from 50% to 70% of qualified wages they pay to employees after December 31, 2020, through June 30, 2021. This increased the maximum amount of credit available from $5,000 for an employee to $7,000 per quarter. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. The recent legislation also reduced the declining gross receipts test necessary from 50% to 20%.

Notice 2021-23 provides clarification on this legislation.

Key Points and Clarifications:

● Gross receipts for the current calendar quarter should be compared to the same calendar quarter in 2019. Alternatively for 2021, the immediately preceding calendar quarter with those for the corresponding calendar quarter in 2019, (for example, the Q1 2021 test can compare to gross receipts in Q4 2020 vs Q4 2019).

● Eligible employers may now claim ERCs equal to 70% of qualified wages paid to an employee in 2021.

● Qualified wages are capped at $10,000 per employee per calendar quarter in 2021, meaning the maximum ERC available per employee is $28,000 for all of 2021.

● Small employers with 500 or fewer full-time employees may claim advance payment of ERCs to which they are entitled by filing Form 7200, Advance of Employer Credits Due to COVID-19. Still, such advances are not available to large employers (over 500 full-time employees) in the first two calendar quarters of 2021.

● A governmental entity that is a college or university, or the principal purpose or function of providing medical or hospital care, is an eligible employer for purposes of ERTCs for wages paid in the first two calendar quarters of 2021.

Penalty Relief Notice 2021-24

Notice 2021-24 provides penalty relief for businesses that are anticipating but might not have calculated their employee retention credit yet. For businesses deciding whether they qualify or not, they might not be ready to deposit these payroll taxes. Not only is this notice giving businesses penalty relief for employee retention credit, but for other credits that are intended to provide relief for the pandemic.

How businesses can claim their credit:

Form 941

Businesses can claim their credit on their quarterly filed tax returns. This will usually reduce the amount of payroll tax the business deposits by the amount of the credit.

Form 7200

In 2021, some businesses are eligible to apply for an advanced payment of credit. If the amount of credit calculated is more than the amount of payroll tax the business owes, they may apply for an advanced credit on Form 7200.

Contact Us for Assistance

If you would like more information on Employee Retention Credits or need help with tax preparation, contact our tax professionals at The Innovative CPA Group at 203-489-0612 or via our contact form.