Although the Employee Retention Credit (ERC) expires at the end of 2021, eligible businesses can still claim the credit for the third and fourth quarters of 2021.
The IRS recently issued Notice 2021-49, providing further guidance on claiming the credit for qualified wages paid after June 30, 2021, and before January 1, 2022.
Employee Retention Credit Basics
The ERC was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and signed into law in March of 2020 to encourage businesses to keep employees on their payroll. Subsequent legislation has amended and extended the credit. For 2021, the credit is worth up to 70% of the first $10,000 of qualified wages paid per employee per quarter. In other words, employers can claim $7,000 per quarter per employee, up to $28,000 per employee in 2021.
Eligible employers must be carrying on a trade, business, or tax-exempt organization that:
- Has fully or partially suspended business operations due to an order from a governmental authority limiting commerce, travel, or group meetings due to COVID-19,
- Experienced a decline in gross receipts of 50% or more for the calendar quarter compared to the same quarter in 2019, or
- Is a “recovery startup” business launched after February 15, 2020, with average annual gross receipts of $1 million or less. (Recovery startup businesses are subject to a quarterly ERC cap of $50,000.)
Businesses of any size can qualify for the ERC, but large and small businesses are treated differently.
- Employers with more than 100 full-time employees (FTEs) must pay employees qualified wages while not working due to COVID-19-related circumstances.
- Employers with 100 or fewer FTEs can pay qualified wages to employees whether the business is open or subject to a full or partial shutdown order.
Wages That Qualify for the ERC
When calculating qualified wages for claiming the ERC, employers can generally use all wages and compensation subject to FICA taxes, as well as the cost of employer-paid health benefits. These wages and benefits must have been paid after March 12, 2020, and qualify for the credit if paid through December 31, 2021.
IRS Notice 2021-49 also clarified that tips could be included in qualified wages if they were subject to FICA. Generally, if tips are greater than $20 in a calendar month for an employee, all tips would be included in qualified wages to calculate the ERC.
Claiming the Employee Retention Credit in Q3 and Q4 2021
The American Rescue Plan Act (ARPA) of 2021 also modified how employers can claim the ERC for the third and fourth quarters of 2021. For the first two quarters of the year, an eligible employer can reduce the share of Social Security tax it would normally have to deposit in anticipation of receiving the ERC.
However, beginning July 1, 2021, employers must deposit their 6.2% share of Social Security tax for Q3 and Q4 wages and can only hold its 1.45% share of Medicare tax in anticipation of receiving the credit. This change can affect the ability of employers to claim the ERC immediately. Instead, they may need to file for an advance of the ERC using Form 7200.
If the credit exceeds the employer’s total liability for its share of Medicare tax, the excess will be refunded to the employer. At the end of the quarter, any portion of the credit claimed in advance will be reconciled on the employer’s Form 941.
The ERC’s Uncertain Future
The U.S. Senate recently passed the Infrastructure Investment and Jobs Act (H.R. 3684), which would eliminate the ERC for the fourth quarter of 2021. However, the legislation is not yet law, as the U.S. House of Representatives is on recess until the fall. If passed, recovery startup businesses would remain eligible through the end of the year.
In the meantime, to learn more about the Employee Retention Credit or get help calculating your potential credit amount, please reach out to MST CPAs. We can help you determine which wages qualify for the ERC and whether filing for an advance of the credit is the right move for you.