IRS amplifies and updates ERC for second half of 2021.

• Author: Bonner, Paul
• Position: Employee retention credit

The IRS issued Notice 2021-49 that includes guidance on the extension and modification of the employee retention credit (ERC) under Sec. 3134, added by the American Rescue Plan Act (ARPA), P.L. 117-2. The notice amplifies Notices 2021-20 and 2021-23 (see also Schreiber, "IRS Issues Employee Retention Credit Guidance," The Tax Adviser (March 2, 2021), and Schreiber, "How to Claim the Employee Retention Credit for the First Half of 2021," The Tax Adviser (April 5, 2021)) by providing additional guidance on claiming the ERC in the third and fourth calendar quarters of 2021.

As amplified by Notice 2021-49, the rules set out in Notices 2021-20 and 2021-23, which provided guidance under the ERC as enacted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and amended by the Consolidated Appropriations Act, 2021, P.L. 116-260, will continue to apply to the third and fourth calendar quarters of 2021.

Under Notice 2021-49, an ERC may be claimed by an eligible employer for qualified wages paid in the third and fourth calendar quarters of 2021. An eligible employer is an employer carrying on a trade or business (1) whose trade or business's operation is fully or partially suspended due to orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19; or (2) that experiences a decline in gross receipts (as defined in Notices 2021-20 and 2021-23); or (3) is a recovery startup business.

A recovery startup business is an employer that (1) is not otherwise an eligible employer under conditions (1) or (2) of the preceding sentence; that (2) began carrying on a trade or business after Feb. 15, 2020; and (3) has average annual gross receipts for the three tax years preceding the quarter in which it claims the credit of no more than $1 million (with rules under Sec. 448(c)(3) for their calculation if the entity has not been in existence for three years and by reference to the entity's predecessor).

One change under the ARPA rules for the ERC under Sec. 3134 is that, for the third and fourth quarters of 2021, eligible employers claim the credit against the employer's share of Medicare tax (or equivalent portion of Tier 1 tax under the Railroad Retirement Tax Act) rather than, as previously, against the employer's share of Social Security tax (or its equivalent Railroad Retirement Tax Act portion).

Although the limit on the maximum ERC in the first half of 2021 of 70% of up to $10,000 of an...