New Guidance on Employee Retention Credit

On March 18th, 2021, the Internal Revenue Service (IRS) updated information on its Employee Retention Credit (ERC). The ERC issues a refundable tax credit to eligible employers who have retained employees during the COVID-19 pandemic. Earlier this year, the IRS released a new notice covering health and dependent care assistance programs.

Updates to the Employee Retention Credit Web Page

As mentioned above, the ERC is a fully refundable tax credit for employers. Under newly released Notice 2021-20, the IRS clarifies retroactive changes to the ERC. (Notice 2021-20 is now available on the ERC web page.) Those changes include the tax credit being equal to 50 percent of qualified wages that eligible employers pay their employees. Any wages include qualified health plan expenses and apply to wages paid between March 12th, 2020, and January 1st, 2021. The maximum amount of qualified wages considered with respect to each employee for all calendar quarters is $10,000. Accordingly, the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000.

Definition of an Eligible Employer

Additionally, Notice 2021-20 clarifies the definition of an eligible employer. Under the ERC, an eligible employer is one that had a trade or business during calendar year 2020. This definition includes tax-exempt organizations and businesses that either, due to COVID-19:

• fully or partially suspended operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority. That suspension resulted in a limit to commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
• experienced a significant decline in gross receipts during the calendar quarter.

Additional Employer Retention Credit Clarifications

Notice 2021-20 also provides answers to questions such as:

• what constitutes full or partial suspension of trade or business operations;
• what is a significant decline in gross receipts;
• how does an eligible employer claim the employee retention credit;
• what constitutes a qualified wage;  and
• how does an eligible employer substantiate the claim for the credit?

Employer Takeaways

On the whole, the release of Notice 2021-20 should assist employers in applying for the Employer Retention Credit. The information provided by the IRS, however, does not reflect the most recent changes to regulations. For example, the Notice does not mention the Taxpayer Certainty and Disaster Tax Relief Act (Relief Act) of 2020. It also does not mention the American Rescue Plan Act of 2021 (ARP Act). The Relief Act amended and extended the Employee Retention Credit for the first and second calendar quarters of 2021. The ARP Act modified and extended the ERC for the third and fourth quarters of 2021. The IRS plans to release additional guidance soon addressing the changes for 2021.