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IRS Guidance Advises Employers on Claiming an Employee Retention Credit in 2021

  • IRS issues supplemental guidance on the Employee Retention Credit
  • Credit was extended through the end of this year as part of the American Rescue Plan
  • Smaller companies can request an advance on the credit for the first two quarters of 2021

Summary by Dirk Langeveld

Following the extension of the Employee Retention Credit, the Internal Revenue Service has issued guidance on how employers can claim this benefit for the first two quarters of 2021.

While the credit was originally set to expire on June 30, the American Rescue Plan extended to cover wages paid through the end of 2021. Eligible employers can claim a refundable tax credit against the employer share of the Social Security tax equal to 70 percent of the qualified wages they pay to employees. The amount of qualified wages is capped at $10,000 per employee per quarter, meaning employers can claim a maximum credit of $7,000 per employee for each of the first two quarters of 2021.

Employers can also qualify for credits for wages paid in the last two quarters of 2021, although the current IRS guidance applies only to the first two quarters. Further guidance is expected at a later date.

Employers are eligible to claim the credit if they experienced a full or partial shutdown of operations due to government mandates. They also qualify if they can demonstrate a decline in gross receipts of at least 20 percent.

For the first quarter of 2021, businesses can opt to compare the fourth quarter of 2020 with the fourth quarter of 2019 to demonstrate qualifying revenue losses. For the second quarter, they have the option of comparing the first quarter of 2021 with the first quarter of 2019.

Smaller employers, or those where the average number of employees during 2019 was fewer than 500, can request an advance payment of the credit for the first two quarters of 2021. This can be done prior to the filing of employment tax returns by reducing the employment tax deposits in anticipation of the credit. Small businesses formed in 2021 are ineligible to file for an advance, but can still reduce employment tax deposits in preparation for the credit.

Any employers requesting an advance are required to fill out IRS Form 7200.

In addition to the 2021 credits, employers can claim a credit for 2020 if they can demonstrate a quarterly decline of at least 50 percent in gross receipts. The 2020 credit offers 50 percent of qualified wages paid per employee with a cap of $10,000, so employers can receive up to $5,000 per employee for the year.

Smaller employers can claim a credit for all wages paid to employees, while larger ones can only claim a credit for wages paid to employees during a time when they are not providing services. Large employers were originally defined as having more than 100 employees, and this cap holds for 2020 claims.

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