April 6, 2021 – The IRS published Notice 2021-23 on April 2 with new guidance regarding changes made to the Employee Retention Credit for 2021. This Notice follows the extensive Notice 2021-20 which covers details of the ERC related to 2020. The new Notice only deals with the new rules for the first two calendar quarters of 2021 that were passed by Congress last December. The further modifications made more recently by Congress in the American Rescue Plan legislation which apply to the last two quarters of the year will be explained in yet another forthcoming Notice.
The primary changes to the ERC explained in Notice 2021-23 are the increase in the maximum credit amount from a total of $5,000 per employee in 2020 to up to $7,000 per quarter per employee in 2021, and the change to the gross receipt eligible employer test from a 50% reduction to 20%.
In a footnote, the IRS clears up one of the ongoing debates about the rules of the ERC. The legislation provides a more generous tax credit calculation for small businesses compared to large businesses. Business size is determined by the number of full-time employees employed during 2019 based on the rules for counting employees within the Affordable Care Act, section 4980H. However, within section 4980H one can find two distinct methods for counting full-time employees, one that includes full-time equivalents, and another that does not. Soon after the passage of the CARES Act, the Joint Committee on Taxation indicated that the CARES Act is referring to the method that includes full-time equivalents, while the IRS FAQs and Notice 2021-20 described the method that excludes full-time equivalents (but without explicitly saying so). The new footnote states, “In accordance with section 4980H(c)(4) of the Code and as provided by Notice 2021-20, the term ‘full-time employee’ for purposes of the employee retention credit means an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month (130 hours of service in a month is treated as the monthly equivalent of at least 30 hours of service per week).” By specifically referencing section 4980H(c)(4) as opposed to 4980H(c)(2)(E), the IRS is now explicitly directing taxpayers to use the method excluding full-time equivalents.
IRS Notice 2021-23 can be found here.