Last month, the Internal Revenue Service (IRS) issued a new notice containing guidance for employers who wish to claim the Employee Retention Credit (ERC) in the first two quarters of 2021. Employers can access the credit before filing their employment tax returns by simply reducing employment tax deposits. DM Payroll Solutions highlights the top five changes to the ERC, including:

1. Increase of the Maximum Credit Amount

After updates made by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, eligible employers can claim a refundable tax credit against their share of social security tax equal to 70% (previously 50%) of qualifying wages paid to employees between Dec. 31, 2020, and June 30, 2021. These wages are capped at $10,000 per employee per quarter in 2021. Therefore, the maximum ERC available per employee per quarter is $7,000, totaling $14,000 for the first half of the year.

2. Further Inclusion of ERC-Eligible Employers

Educational institutions that are tax-exempt now qualify for the ERC. These include, but are not limited to:

• Public colleges
• Universities
• Elementary and secondary schools
• Governmental entities with a focus on providing medical care

It has not yet been clarified whether partial shutdown rules will be applied to these institutions, but the IRS’s latest notice helps them by confirming they can take ERC relief.

3. Updates to the Gross Receipts Test Threshold and How to Calculate

The decline in gross receipt threshold is reduced from 2020’s 50% to 2021’s 20% for ERC purposes. Typically, the reduction in gross receipts is established by contrasting the gross receipts from the first quarter of 2021 with that of the first quarter of 2019. As for the second quarter of 2021, the gross receipts will be compared to the respective quarter of 2019. If the employer was not in business in 2019, they may use quarterly gross receipts from 2020 for the same quarter in 2021 for the calculation.

The notice also dives into the provision allowing employers to opt to use another quarter to calculate gross receipts, known as the “look-back rule”. This method takes the gross receipts’ numbers from the prior quarter (instead of the current quarter) in showing a decline greater than 20% in gross receipts. A lot of business owners were worried the IRS would make the look-back rule election an all-or-nothing approach but luckily, it didn’t, and more businesses are eligible for this relief as a result. 

4. Changes in Employer Definitions

“Large” eligible employers in 2021 are considered as those that have greater than 500 full-time employees in 2019; “small” eligible employers had fewer than 500. Prior to this distinction, the threshold was 100 full-time employees.

5. Requesting Advanced Payment of the ERC

Small eligible employers can request advance payment of the ERC in an amount no more than 70% of the average quarterly wages paid in 2019 using Form 7200, Advance Payment of Employer Credits Due to COVID-19. Large eligible employers are not eligible for any advances in 2021.

Claiming the Credit

Employers without Paycheck Protection Program (PPP) loans or who have already received loan forgiveness should file Form 941-X for each quarter they are claiming the credit for. If an employer has not yet received loan forgiveness, they should file Form 941 for the fourth quarter of 2020 or a Form 941-X for each quarter they are claiming the credit for.

What About the Second Half of 2021?

President Biden’s new American Rescue Plan Act (ARPA) extends the ERC to eligible employers for wages paid into the third and fourth quarters of 2021, but guidance from both the IRS and Department of the Treasury is still needed for insight on how employers should proceed. In the meantime, reporting your number of employees, their wages and appropriately managing employment tax are all imperative for qualifying for the ERC. Contact DM Payroll Solutions today for more information on our robust reporting features and to learn how we can make applying for the ERC easier.