The IRS has issued guidance for employers claiming the employee retention credit enacted by the American Rescue Plan Act of 2021 (ARP), which provides a credit for wages paid after June 30, 2021, and before January 1, 2022. The guidance amplifies previous notices which addressed the employee retention credit created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), then extended and expanded under the Consolidated Appropriations Act, 2021.
In general, eligible employers can claim a refundable employee retention credit against the employer share of Social Security tax equal to 70 percent of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum employee retention credit available is $7,000 per employee per calendar quarter, for a total of $14,000 for the first two calendar quarters of 2021. Under the guidance, these limits continue to apply in the third and fourth calendar quarters in 2021.
The guidance explains changes made to the employee retention credit for the third and fourth calendar quarters of 2021, including:
- making the credit available to eligible employers that pay qualified wages after June 30, 2021, and before January 1, 2022;
- expanding the definition of eligible employer to include “recovery startup businesses”;
- modifying the definition of qualified wages for “severely financially distressed employers”; and
- providing that the credit does not apply to qualified wages taken into account as payroll costs in connection with a shuttered venue grant under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, or a restaurant revitalization grant under the ARP.
Recovery Startup Businesses
A “recovery startup business” is an employer:
- that began carrying on any trade or business after February 15, 2020;
- for which the average annual gross receipts of the employer for the three tax year period ending with the tax year that precedes the calendar quarter for which the credit is determined does not exceed $1,000,000; and
- that is not otherwise an eligible employer due to a full or partial suspension of operations or a decline in gross receipts.
For an eligible employer that is a recovery startup business, the amount of the credit allowed for each of the third and fourth calendar quarters of 2021 cannot exceed $50,000.
The rules for determining the average number of full-time employees continue to apply in the third and fourth calendar quarters of 2021. However, the Code provides a different rule for qualified wages paid by “severely financially distressed employers.” For the third and fourth calendar quarters of 2021, an eligible employer with gross receipts that are less than 10 percent of the gross receipts for the same calendar quarter in calendar year 2019 (or 2020, if the employer was not in existence in 2019) is a severely financially distressed employer. For the third and fourth calendar quarters of 2021, a severely financially distressed employer that is a large eligible employer may treat all wages paid to its employees during the quarter in which the employer is considered severely financially distressed as qualified wages.
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their employment tax returns for the applicable period. If a reduction in the employer’s employment tax deposits is not sufficient to cover the credit, certain employers may receive an advance payment from the IRS by submitting an advance form.
Please call our office, your business may have an opportunity to take advantage of the expansion of the employee retention credit in the third and fourth quarters of 2021.