On April 2, 2020, the Internal Revenue Service (IRS) made public a new set of instructions for businesses that are eligible to claim the Employee Retention Credit (ERC). Employers will be able to reduce their employment tax deposits and utilize the ERC for the first and second quarters of 2021 before they are required to file their employment tax returns.
The following are some of the updates that are included in Notice 2021-23, which emphasizes the changes that have been made to the ERC for the first two quarters of 2021:
1. An increase in the maximum credit amount, from fifty percent to seventy percent of the total
- As a result of the updates brought about by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, qualifying employers will be able to claim a refundable tax credit against their share of Social Security tax that is equal to 70 percent of the eligible wages paid to employees after the 31st of December 2020 and before the 30th of June 2021. These wages are capped at a maximum of $10,000 per employee for each and every quarter in 2021. As a direct result of this, the maximum employee ERC that is available to each employee for each quarter is $7,000, for a grand total of ,000 for the first half of 2021.
2. The Enlargement of Employers That Are Eligible for the ERC
- Tax-exempt educational institutions, such as public colleges and universities, elementary schools, secondary schools, and governmental entities whose primary purpose is to provide medical care, are now eligible for the ERC. This includes elementary schools, secondary schools, and elementary schools. Although it is not yet quite apparent how the laws governing the partial government shutdown will be applied to these institutions, the Internal Revenue Service is assisting these groups by recognizing that they will now qualify for ERC exemption.
3. Alterations to the Test Threshold and Calculation Method for Gross Receipts
- The decline in gross receipts criterion will be lowered from 50 percent for the ERC in 2020 to 20 percent for the ERC in 2021. In most cases, the amount of the decline in gross receipts is calculated by contrasting the amount of gross receipts earned during the first quarter of 2021 with the amount earned during the first quarter of 2019. When looking at the gross receipts for the second quarter of 2021, a comparison is made to the second quarter of 2019.
- If the employer did not exist in 2019, then the employer can compare the gross receipts from their quarterly existence in 2021 to the same quarter in 2020. (instead of 2019).
- The new guidance provides more information on the provision that permits employers to choose to compute gross receipts based on a different calendar quarter (look-back rule). This method uses the data for the preceding quarter’s gross receipts rather than those for the current quarter in order to demonstrate that there has been a decline in gross receipts of more than 20 percent. For instance, the employer may utilize the gross receipts from the fourth quarter of 2020 to compare to the gross receipts from the fourth quarter of 2019, and this may be done for the first calendar quarter of 2021. If the taxpayer was not in existence at the beginning of the fourth quarter of 2019, then they would not be eligible to make this selection. When calculating the results for the second quarter of 2021, the look-back period will be the first three months of 2021 compared to the first three months of 2019. Many business owners were anxious that the Internal Revenue Service (IRS) would make the election an all-or-nothing approach, but thankfully, it did not do so, and now a greater number of businesses are eligible for this option for tax relief.
4. updates to the Existing Standards for the Determination of Qualified Wages
- The amount of wages that are considered qualified is determined by taking the monthly average of full-time employees in 2019. Employees who have worked an average of at least 30 hours per week or 130 hours in a given month are considered to be full-time employees for the ERC.
- If a company has less than 500 employees in 2019, qualifying wages include those paid to all employees, even if the firm had more than 500 employees in 2021. This is true even if the employer had fewer than 500 employees in 2019.
- Qualified wages are wages provided to employees during the time that they were not working and the firm had more than 500 full-time employees in 2019. The prior criteria for eligibility for the ERC in 2020 was set at 100 full-time employees.
- The Internal Revenue Service has not yet clarified whether or not part-time employees are included in the calculation for full-time employees. Including part-time employees in this calculation would have a significant impact on the ERCs for 2020 and 2021, as it would make it possible to take into account the wages of a significantly larger number of employees. Since there has not been a decision reached as of yet, part-time employees should not be factored into the calculation until more guidance is provided.
5. New Restrictions That Make It Harder for Small Businesses to Ask for an Advance on the ERC Payment
- Employers that are eligible and have an average of 500 or less full-time employees in 2019 may seek advance payment of the credit on Form 7200, Advance Payment of Employer Credits, after decreasing deposits. As a result of COVID-19. In the year 2021, advancements will no longer be available to employers that have more than 500 employees on staff.
Claiming Ownership of the Credit
Employers that are eligible but do not have a Paycheck Protection Program (PPP) loan or who have already had their loan forgiven should complete Form 941-X for each quarter that they intend to claim credit for. In the event that an employer has not been granted PPP loan forgiveness, they are required to file either a Form 941 for the fourth quarter of 2020 or a Form 941-X for each quarter that they claim.
The guidance suggests that eligible employers should reduce their payroll deposits, including the federal income tax withheld from employees, along with both the employee and employer portions of the Social Security and Medicare taxes, and file a Form 941 for each applicable quarter in order to claim the credit for the first and second quarters of 2021.
More Guidance to Come
Despite the fact that the ERC will be made available to qualifying employers for wages paid in the third and fourth quarters of 2021 thanks to President Biden’s American Rescue Plan Act (ARPA), the Internal Revenue Service and the Department of the Treasury will be providing additional information in the near future. In the meanwhile, you should get in touch with the tax experts at Doeren Mayhew as soon as possible if you want assistance calculating or claiming the ERC for the first half of 2021.
The Internal Revenue Service Has Issued Guidance Regarding the Eligibility Rules for the Employee Retention Credit
The Internal Revenue Service (IRS) has issued guidance for employers claiming the employee retention credit (ERC), which includes clarifications and retroactive modifications under the new law effective to 2020. These changes are principally linked to the extended eligibility for the credit.
Latest IRS Guidance Details
The Internal Revenue Service (IRS) stated the following main takeaways in relation to the ERC in Notice 2020-21:
- Wages That Count Towards Qualification. Employers who paid qualifying wages after March 12, 2020 and before January 1, 2021 and who experienced a complete or partial suspension of their activities or a considerable decline in gross receipts are eligible to file an ERC claim for the year 2020. This credit is equal to fifty percent of qualifying wages paid, which also includes qualified health plan expenditures, for an employee up to a maximum of ten thousand dollars in 2020. In the year 2020, the maximum credit that may be awarded to each employee is $5,000.
- Interaction with Loans Offered Through the Paycheck Protection Program (PPP). Employers who have a Paycheck Protection Program (PPP) loan are now eligible to make a claim for the Employer Responsibility Contribution (ERC), which was one of the most important changes that the Consolidated Appropriations Act of 2021 brought about for the year 2020. However, in order to qualify for loan forgiveness through the PPP and to meet the requirements for the ERC, you cannot count the same wages.
- Rules for Aggregating Data. A controlled group of companies, trades, or businesses that are under the same control shall be considered as a single employer for the purposes of implementing the ERC. This applies to any and all entities that are members of the controlled group. As a result of this, employers that are mandated to be aggregated are considered to be a single employer for the purposes of the regulations that are relevant to the ERC, which are as follows:
- Determining whether or whether the employer has a trade or business operation that was fully or partially halted as a result of orders linked to COVID-19 issued by an appropriate governmental body
- Determining if the employer has seen a considerable decline in gross receipts and the reasons for this drop
- Determining whether or not the firm has an average of more than one hundred employees working full-time and
- Figuring out how much of a credit limit each employee is allowed to use.
- Documentation Requirements. Employers are required to give paperwork to explain how they decided an employee’s eligibility. This documentation must include the following items:
- Any order by a governmental agency to halt the activities of the employer’s business.
- Any documents that the employer relied on to determine whether or not their operations were halted as a result of an order from the government.
- Any documents that the employer utilized to determine that it had a significant decline in gross receipts and used to support its conclusion.
- Any documents that detail which employees earned eligible wages, in what amounts, and for how long, and
- In the instance of a major company who is eligible, work records and evidence demonstrating that wages were received for a period of time during which an employee was not performing services are required.
Employers will also be required to submit documentation, such as how they determined the amount of allocable qualified health plan expenses and whether or not the employer was treated as a member of an aggregated group for purposes of the ERC. Additionally, employers will be required to submit copies of completed federal employment tax returns. This requirement is in addition to the current requirement that employers submit copies of federal employment tax returns.
Evaluation of Eligibility
Answering the questions that follow in relation to your company will help you determine your overall eligibility for the ERC grant:
1. Are you a tax-exempt organization or a privately held business that operated a trade or business during the years 2020 or 2021 according to the calendar?
2. Do any of these three requirements apply to you, even if just partially?
A. Your business’s operations were fully or partially halted during any calendar quarter in 2020 or 2021 because of directives from the government restricting the activities of your company because of COVID-19.
B. You had a decline in total gross receipts during any calendar quarter in 2020 that was more than a fifty percent decrease from the corresponding quarter in 2019.
C. You had a decline in total gross receipts during any calendar quarter in 2021 that was more than a twenty percent decrease from the corresponding quarter in 2019.
3. Have you received wages that were not or will not be included in a PPP loan forgiveness application after March 12, 2020, and before July 1, 2021?
It is possible that you are eligible for the ERC since you responded “yes” to all three questions. Ensure that you are getting the most out of your tax credit by working closely with your tax adviser.