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March 8, 2021

IRS releases formal guidance on employee retention credit for 2020

On March 1, 2021, the IRS released formal guidance (Notice 2021-20) on the employee retention credit (ERC) for 2020. Notice 2021-20 incorporates most of the FAQs that had been posted on the IRS website, with certain modifications and additional guidance.


The ERC was enacted on March 27, 2020, as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) for wages paid from March 13, 2020 through December 31, 2020, by employers that were (1) fully or partially suspended due to COVID-19-related governmental orders or (2) experienced a more than 50% decline in gross receipts for the calendar quarter as compared to the same calendar quarter in 2019 (see Tax Alert 2020-0761). The ERC is a refundable employment tax credit for eligible employers paying qualified wages and health plan expenses. On April 29, 2020, the IRS posted over 90 ERC FAQs on its website. Certain FAQs were later modified, and new FAQs were added over time.

On December 27, 2020, the Consolidated Appropriations Act, 2021 was enacted, which included the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Disaster Relief Act). Sections 206 and 207 of the Disaster Relief Act extended and broadened the expiring ERC. Certain changes were retroactive to enactment of the CARES Act, but most apply only to wages paid from January 1, 2021 through June 30, 2021 (see Tax Alert 2021-0019).

Notice 2021-20

Notice 2021-20 incorporates the retroactive ERC amendments made by Section 206 of the Disaster Relief Act, but does not address the changes made by Section 207 of the Disaster Relief Act, which apply on a prospective basis for qualified wages paid in 2021. The notice states that the IRS will address those changes in future guidance.

Notice 2021-20 uses a question-and-answer format. Most of the questions and answers closely track the website FAQs, with minor clarifications. In addition, there are some significant clarifications and entirely new content, as listed later.

Meaning of "nominal." If a governmental order allowed an employer's business operations to continue subject to modification, the website FAQs indicated that the modification ought to have "more than a nominal effect" on the business operations to be a partial suspension. This point was illustrated through examples. Notice 2021-20 includes the same examples but also identifies a list of factors to consider in analyzing whether an order's impact on a business's operations is more than nominal. Additionally, the "more than nominal" concept is introduced as a way to analyze whether an impact to one portion of an essential business is sufficient to suspend the larger essential business. The Notice deems a portion of the business operations to be more than nominal if either:

  • The gross receipts from that portion of the business operations is at least 10% of the total gross receipts (both determined using the gross receipts of the same calendar quarter in 2019)


  • The hours of service performed by employees in that portion of the business is at least 10% of the total number of hours of service performed by all employees in the employer's business (both determined using the number of hours of service performed by employees in the same calendar quarter in 2019)

Meaning of "comparable." Under the website FAQs, a partial suspension does not occur if an employer's workplace is closed by a governmental order but the employer is able to continue operations comparable to its pre-closure operations by requiring employees to telework. Notice 2021-20 includes the same examples as the website FAQs and also lists the following new factors to consider in making this determination:

  • The employer's telework capabilities
  • The portability of employees' work
  • The need for presence in the employees' physical workspace
  • The transition to telework operations

Interaction with Paycheck Protection Program (PPP) loans. As originally enacted, the CARES Act prohibited employers that received PPP loans from claiming the ERC. Section 206 of the Disaster Relief Act narrowed the limitation so that employers receiving PPP loans may elect to treat payroll costs paid during the loan-covered period as qualified wages to the extent the wages are not paid with forgiven PPP loan proceeds. As a result, employers may claim the ERC for that portion of wages. Notice 2021-20 provides general rules and seven examples showing how to determine the portion of ERC-eligible wages based on the amount claimed as payroll costs on the employer's loan forgiveness application.

Income tax deduction. Notice 2021-20 requires employers to reduce their deduction for qualified wages, including qualified health plan expenses, by their ERC amount. The employer does not reduce its deduction for its share of Social Security and Medicare taxes by any portion of the credit.

Substantiation requirements. Notice 2021-20 specifies the records that employers should maintain to substantiate eligibility for the credit. The specified records include:

  • The relevant governmental orders
  • Any records on which the employer relied to analyze whether a sufficient portion of the business was suspended or whether the impact on the business was sufficient to suspend operations
  • Records used to establish a gross receipts decline
  • Records of qualified wages
  • Documentation of qualified health plan expenses
  • Documentation of aggregated group analysis
  • Copies of Forms 7200
  • Copies of federal employment tax returns

The Notice indicates that the records should be maintained for at least four years.


Notice 2021-20 is eliciting mixed reactions. Some taxpayers and practitioners are pleased to have formal guidance upon which they can rely and appreciate the additional clarity provided in the revisions to the text of the website FAQs. Others question whether the benefits of formal guidance can be fully realized when Notice 2021-20 was released a month or more after the due date for the tax return to which it relates. (As Notice 2021-20 explains, the due dates for the Forms 941 for the relevant quarters in 2020 were July 31, 2020, November 2, 2020, and February 1, 2021.)

Most taxpayers will find Notice 2021-20's substantive modifications to the website FAQs to be modest enough that they will not meaningfully affect the positions underlying ERC claims that have already been filed. On the other hand, taxpayers that have not yet claimed the ERC for 2020 wages may want to consider the guidance in Notice 2021-20 carefully before filing Forms 941-X.

The clarification of the income tax deduction disallowance will be more timely than the guidance on the ERC itself. Many taxpayers, however, will have limited time for analysis before their income tax returns and associated information returns are due.


Contact Information
For additional information concerning this Alert, please contact:
Compensation and Benefits Group
   • Christa Bierma (
   • Stephen Lagarde (
   • Rachael Walker (
   • Bing Luke (
Workforce Tax Services/Affordable Care Act
   • Ali Master (
   • Tim Parrish (