In accordance with the American Rescue Plan Act (ARPA) passed in March of 2021, Notice 2021-23 expands the benefits of the “employee retention credit” (ERC) for 2021.
The ERC available to an employer is claimed as a credit against the employer’s share of Social Security tax. There is also a refundable portion of this credit that can help offset other portions of the employer’s payroll tax liability.
Generally, the ERC is available to employers whose business gross receipts in 2020 and 2021 were at least 50% or 20%, respectively, less per qualified quarter for the same period in 2019 or that fully or partially suspended its operations due to government-imposed restrictions related to COVID-19. For 2021, eligibility can also be made for a quarter based on the gross receipts’ comparison for the previous quarter. As an example, a business may choose to qualify for the first quarter of 2021 based on a comparison of the fourth quarter 2020 gross receipts with the fourth quarter 2019 gross receipts.
Under prior law and IRS guidance, the employer (or any member of its controlled group) was not eligible for the ERC if it received a Paycheck Protection Program (PPP) loan. The new guidance, in accordance with the ARPA, retroactively revokes this limitation. However, limitations on the credit are imposed to the extent wages were used to qualify for forgiveness of a PPP loan.
The maximum credit amounts are:
- For 2020, the lesser of $5,000 or 50% of the first $10,000 of “qualified” wages per employee.
- For 2021, the ARPA increased the credit to the lesser of $7,000 or 70% of the first $10,000 per employee in each quarter of the year not to exceed $28,000 per employee per year.
The definition of “qualified” wages:
- For small employers, wages and expenses paid to qualified health plan expenses for all employees:
- For qualification in 2020, a small employer is defined as having had 100 or fewer full-time employees in 2019 and 500 or fewer in 2021 to qualify in that year. Full-time employees are defined as those averaging 30 hours of service per week or 130 hours of service per month.
- For large employers, only the wages paid to a qualified health plan on behalf of an employee for periods the employee was not actively employed.
Additionally, the ARPA extended the qualification for credit to colleges, universities, hospitals and entities that provide medical care.