In April, the IRS released guidance for employers claiming the Employee Retention Credit ("ERC") under the CARES Act, as modified by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 and ARPA. Employers may now claim a credit against the employer's share of the Social Security tax equal to 70% of the qualified wages paid to employees during the first two quarters of 2021. Qualified wages are limited to $10,000 per employee per quarter, therefore the maximum ERC is $7,000 per employee each quarter. Separate limits apply to certain "recovery startup businesses" that commenced operations on or after February 15, 2020

To be eligible to receive the ERC, an employer must experience either:

  • A full or partial suspension of the operation of its trade or business in the first two quarters of 2021 because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
  • A decline in gross receipts in a calendar quarter in 2021 where the gross receipts are less than 80% of the gross receipts in the same calendar quarter in 2019.

For large employers (i.e., employers that averaged more than 500 full-time employees in 2019), qualified wages are those wages paid to employees that are not providing services because of suspended operations or due to the decline in gross receipts. For small employers (i.e., employers that averaged 500 or fewer full-time employees in 2019), qualified wages are those paid to all employees during a period of suspended operations or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services.

To claim the ERC for the first two quarters of 2021, employers must report total qualified wages for purposes of the ERC on their federal employment tax returns (usually Form 941). Employers should also report any qualified sick leave and qualified family leave wages on Form 941.

Small employers may request an advance payment of the ERC on Form 7200 (Advance of Employer Credits Due to COVID-19). Prior to requesting the ERC, employers must reduce employment tax deposits so that the advanced payments received are not more than the employment tax deposits made to the IRS. The advance payment is limited, however, and may not exceed 70% of the average quarterly wages paid in calendar year 2019. Large employers are not eligible to receive advance payments.

Small employers may not file Form 7200 to claim an advance payment after filing Form 941 for the same quarter. Form 7200 should be filed as early as possible to ensure it will not be processed after Form 941 has been processed. Employers may file Form 7200 several times during each quarter for subsequent payments that are eligible for credits.

ARPA extended availability of the ERC to the third and fourth quarters of 2021, and the IRS issued Notice 2021- 49 to provide guidance on the ERC for qualified wages paid after June 30, 2021.

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