Notice 2021-23: Guidance on the Employee Retention Credit under the CARES Act for the First and Second Calendar Quarters of 2021 provides guidance on the employee retention credit provided under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act, as amended by section 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, for qualified wages paid after December 31, 2020 and before July 1, 2021. It amplifies Notice 2021-20 and provides employers with guidance on how to determine their eligibility for and the amount of the employee retention credit they may claim for the first and second calendar quarters of 2021.
BACKGROUND
Section 2301 of the CARES Act provides for an employee retention credit for eligible employers, including tax-exempt organizations, that pay qualified wages, including certain health plan expenses, to some or all employees after March 12, 2020, and before January 1, 2021. Section 206 of the Relief Act adopted amendments and technical changes to section 2301 of the CARES Act for qualified wages paid after March 12, 2020 and before January 1, 2021, primarily relating to who may claim the credit. Section 206 is retroactive to the enactment of the CARES Act. Section 207 of the Relief Act, which is prospective only, amends section 2301 to extend the application of the employee retention credit to qualified wages paid after December 31, 2020 and before July 1, 2021, and to modify the calculation of the credit amount for qualified wages paid during that time.
On March 1, 2021, the Department of the Treasury and the Internal Revenue Service issued Notice 2021-20, providing guidance on the employee retention credit under section 2301 of the CARES Act, taking into account the amendments made by section 206 of the Relief Act. Notice 2021-20 continues to apply to all employee retention credits for calendar quarters in 2020. This notice amplifies Notice 2021-20 by providing additional guidance on section 2301 of the CARES Act and addressing the amendments made by section 207, applicable to the first and second calendar quarters of 2021. As amplified by this notice, the applicable provisions of Notice 2021-20 addressing rules that were not changed by section 207, continue to apply to employee retention credits for the first and second calendar quarters of 2021.
Section 9651 of the American Rescue Plan Act of 2021 enacted section 3134 of the Internal Revenue Code, which provides an employee retention credit for wages paid after June 30, 2021 and before January 1, 2022. This notice does not address the employee retention credit provided by section 3134. The employee retention credit governed by section 3134 will be addressed in future guidance.
GUIDANCE
Extension of Employee Retention Credit
An eligible employer may also claim the employee retention credit for qualified wages paid in the first and second calendar quarters of 2021.
Eligible Employers
Any governmental entity that is a college or university, or the principal purpose or function of which is providing medical or hospital care, may be eligible employers for the first and second calendar quarters of 2021, if they satisfy the other requirements to be eligible employers.
Decline in Gross Receipts
For purposes of the employee retention credit for the first and second calendar quarters of 2021, the determination of whether an employer is an eligible employer based on a decline in gross receipts is made separately for each calendar quarter and is based on an 80 percent threshold.
If an employer was not in existence as of the beginning of the first calendar quarter of 2019, that employer determines whether the decline in gross receipts test is met in the first calendar quarter of 2021 by comparing its gross receipts in the first calendar quarter of 2021 to its gross receipts in the first calendar quarter of 2020. If an employer was not in existence as of the beginning of the second calendar quarter of 2019, that employer determines whether the decline in gross receipts test is met in the second calendar quarter of 2021 by comparing its gross receipts in the second calendar quarter of 2021 to its gross receipts in the second calendar quarter of 2020.
For the first calendar quarter of 2021, an employer may elect to use its gross receipts for the fourth calendar quarter of 2020 compared to those for the fourth calendar quarter of 2019 to determine if the decline in gross receipts test is met. If an employer was not in existence as of the beginning of the fourth calendar quarter of 2019, then the alternative quarter election will not be available for the first calendar quarter of 2021.
For the second calendar quarter of 2021, an employer may elect to use its gross receipts for the first calendar quarter of 2021 compared to those for the first calendar quarter of 2019 to determine if the decline in gross receipts test is met. If an employer was not in existence as of the beginning of the first calendar quarter of 2019, then that employer may elect to measure the decline in gross receipts for the second calendar quarter of 2021 using its gross receipts for the first calendar quarter of 2021 compared to those for the first calendar quarter of 2020.
Eligible employers must maintain documentation to support the determination of the decline in gross receipts, including which calendar quarter an eligible employer elects to use in measuring the decline. An election to use an alternative quarter to calculate gross receipts is made by claiming the employee retention credit for the quarter using the alternative quarter to calculate gross receipts.
Maximum Amount of Employer’s Employee Retention Credit
The maximum credit for qualified wages (including allocable qualified health plan expenses) paid to any employee in 2020 is $5,000.
The maximum credit for qualified wages (including allocable qualified health plan expenses) paid to an employee is $7,000 for each of the first and second calendar quarters in 2021 (for a total of $14,000).
Qualified Wages
For purposes of the employee retention credit for 2020, for an eligible employer with an average number of full-time employees greater than 100 during 2019 (2020 large eligible employers), qualified wages are the wages paid to an employee for time that the employee is not providing services due to either
(1) a full or partial suspension of an employer’s business operations due to a governmental order or
(2) the business experiencing a significant decline in gross receipts.
For purposes of the employee retention credit for 2020, for an eligible employer with an average number of full-time employees not greater than 100 during 2019 (2020 small eligible employers), qualified wages are the wages paid with respect to any employee during any period in the calendar quarter in which the business operations are fully or partially suspended due to a governmental order or during any calendar quarter in which the business is experiencing a significant decline in gross receipts.
Section 2301 of the CARES Act, as amended by section 207 of the Relief Act, provides that large eligible employers are eligible employers for which the average number of full-time employees during 2019 was greater than 500 (2021 large eligible employers). Section 2301 of the CARES Act, as amended by section 207 of the Relief Act, provides that small eligible employers are eligible employers for which the average number of full-time employees during 2019 was not greater than 500 (2021 small eligible employers).
The rules provided in Notice 2021-20 are applied using the revised definitions of large eligible employer and small eligible employer for purposes of the employee retention credit for the first and second calendar quarters of 2021.
The rule that qualified wages paid to an employee may not exceed what they would have been paid for working an equivalent duration during the 30 days immediately preceding the commencement of the full or partial suspension of the operation of the trade or business, or the first day of the calendar quarter in which the employer experienced a significant decline in gross receipts, does not apply for determining the employee retention credit for the first and second calendar quarters of 2021.
For eligible employers, remuneration for services described in paragraphs (5), (6), (7), (10), and (13) of section 3121(b) (except with respect to services performed in a penal institution by an inmate) constitutes wages for purposes of determining the employee retention credit for the first and second calendar quarters of 2021.
Notice 2021-20 provides that an employer may not claim a credit under section 45S (employer credit for paid family and medical leave) with respect to the qualified wages for which it claims the employee retention credit, but it may be able to take a credit under section 45S (employer credit for paid family and medical leave) with respect to wages for which it did not claim an employee retention credit, provided the requirements are met with respect to those wages. The same rule also applies to sections 41, 45A, 45P, 51, and 1396 for the first and second calendar quarters of 2021.
The rule that an employee will not be included for purposes of computing the employee retention credit for any period that an employer is allowed a work opportunity credit under section 51 with respect to that employee does not apply to employee retention credits claimed for the first and second calendar quarters of 2021.
Claiming the Employee Retention Credit
Eligible employers may continue to access the employee retention credit for the first and second calendar quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits in anticipation of the employee retention credit.
The requirement to reduce deposits in anticipation of the credit before requesting an advance continues to apply to 2021 small eligible employers.
The average quarterly wages for the 70 percent advance rule are calculated based on the quarterly wages paid by all members of the aggregated group.
For 2021 small eligible employers who file Form 941, Employer’s Quarterly Federal Tax Return, average quarterly wages for the 70 percent advance rule are calculated by averaging the amount required to be reported on Line 5c, “Taxable Medicare wages & tips,” on all Forms 941 required to be filed by a small eligible employer for wages paid in 2019. For 2021 small eligible employers that file an annual federal employment tax return, “average quarterly wages” for the 70 percent advance rule are calculated by dividing the amount required to be reported on the following forms and lines, as applicable, by four:
Line 4, “Total wages subject to Medicare tax” on the 2019 Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees
Line 4c, “Taxable Medicare wages and tips” on the 2019 Form 944, Employer’s Annual Federal Tax Return
The sum of the amounts in the “Compensation” columns of Line 2, “Tier 1 Employer Medicare Tax – Compensation (other than tips and sick pay)” and
Line 9, “Tier 1 Employer Medicare Tax – Sick Pay” on the 2019 Form CT-1, Employer’s Annual Railroad Retirement Tax Return
2021 small eligible employers that employ seasonal workers may elect to determine the average quarterly wages based on the wages for the calendar quarter in 2019 which corresponds to the calendar quarter to which the election relates rather than the average quarterly wages paid in calendar year 2019. A 2021 small eligible employer that employs seasonal workers elects to use the special rule by requesting an advance based on the amount of wages for the calendar quarter in 2019 corresponding to the calendar quarter to which the election relates. 2021 small eligible employers not in existence in 2019 may look to the average quarterly wages paid in 2020 for purposes of applying the 70 percent advance rule. A 2021 small eligible employer that was not in existence in 2019 elects to use the special rule by requesting an advance based on the average quarterly wages paid in 2020.
2021 small eligible employers that come into existence in 2021 are ineligible to receive advance payment of the employee retention credit; however, these 2021 small eligible employers may reduce their deposits of employment taxes in anticipation of claiming the employee retention credit on Form 941 (or other applicable federal employment tax return).
If an eligible employer was in existence for some, but not all, calendar quarters of 2019 or 2020, average quarterly wages should be determined by dividing the sum of the wages paid in 2019 or 2020, as applicable, by the number of calendar quarters in 2019 or 2020, as applicable, in which they existed. If an eligible employer existed for only part of a calendar quarter, they should estimate the wages paid in the entire calendar quarter based on the wages paid in the portion of the calendar quarter in which it existed using any reasonable method. If an eligible employer filing a Form 943, 944, or CT-1 existed for only part of 2019 or 2020, they may use any reasonable method to annualize the wages paid (or compensation for Form CT-1 filers) prior to dividing the amount by four.
EFFECT ON OTHER DOCUMENTS
Notice 2021-20 is amplified as provided in this notice. This notice does not affect guidance in Notice 2021-20 as applied to calendar quarters in 2020.
For the full text, see IRB: 2021-16, April 19, 2021.