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August 9, 2021

IRS provides guidance on employee retention credits for the second half of 2021

In Notice 2021-49 (Notice), the IRS explains how its previous guidance applies to employee retention credits (ERCs) as they were modified and extended to the end of 2021 by the American Rescue Plan Act of 2021 (ARPA). The Notice also gives additional guidance in response to practitioner questions on ERCs.


Section 9651 of ARPA added new Section 3134 to the Internal Revenue Code (IRC), creating an enhanced ERC that was fundamentally an extension of the ERC that was created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and later modified and extended by the Consolidated Appropriations Act, 2021 (CAA) (see Tax Alert 2021-0539). The ERC, as modified by ARPA, applies through the end of 2021 (the CAA had previously extended the credit through June 30, 2021) and provides a credit against payroll taxes based on qualified wages paid by an eligible employer.

In addition to extending the ERC for two additional quarters, ARPA contained two substantive enhancements to the credit:

  • In addition to the original paths to ERC eligibility (a full or partial suspension of operations due to certain COVID-19-related governmental orders or a significant decline in gross receipts), ARPA added a third path for a recovery startup business (RSB). An RSB is an employer that does not qualify under either of the first two eligibility gateways and commenced a trade or business after February 15, 2020, for which the average annual gross receipts over a three-year lookback period (prorated for periods less than three years) do not exceed $1 million. While eligible employers generally are limited to a credit of $7,000 per employee per quarter in 2021, an RSB is limited to a total credit of $50,000 per quarter for all employees.
  • Qualified wages for a "severely financially distressed" employer that experienced a greater-than-90% decline in gross receipts, whether a large or small employer, include any wages paid during the calendar quarter. For other employers, the distinction between large employers averagingd more than 500 full-time employees during 2019 (2020 if the employer did not exist in 2019) and small employers under this threshold continues to apply. For large employers, qualified wages continue to be wages paid to an employee who is not providing services due to the circumstances that caused the employer to be eligible for the credit. For small employers, qualified wages include wages paid — without regard to whether the employee was providing services — during the suspension period or the calendar quarter for which the gross receipts test was met.

In March of 2021, IRS released Notice 2021-20 with guidance on qualified wages paid in 2020, incorporating most of the FAQs from the IRS website and addressing the retroactive ERC amendments made by Section 206 of the Disaster Relief Act (Tax Alert 2021-0513). The IRS then released Notice 2021-23, incorporating the changes made by Section 207 of the Disaster Relief Act that applied to qualified wages paid in the first two quarters of 2021 (Tax Alert 2021-0724).

In addition to clarifying miscellaneous issues affecting the ERC in both 2020 and 2021, Notice 2021-49 amplifies the guidance in the two previous notices so they apply to the second two quarters of 2021 for similar provisions. The Notice also clarifies provisions of IRC Section 3134 created by ARPA.

Notice 2021-49

In Notice 2021-49, the IRC Section 3134 provisions are clarified as follows:

  • With regard to RSBs, the determination of whether a taxable employer began carrying on a trade or business after February 15, 2020, is made in the same manner as under IRC Section 162, meaning the business has begun to function as a going concern and performed the activities for which it was organized. In addition, tax-exempt entities may qualify as RSBs based on their operations and gross receipts. Although ARPA did not include a definition for qualified wages of an RSB, the Notice treats all wages paid by an RSB that is a small employer as qualified wages. This approach appears to leave an RSB that is a large employer without a definition of qualified wages, and hence without a credit (the Treasury Department and the IRS indicate that they do not anticipate any RSBs being large employers).
  • A "severely financially distressed" employer is not a separate category of eligible employer; once it has been established as such, however, the Notice provides a special rule for identifying qualified wages. The credit is available only for qualified wages the employer paid in the same quarter it claims the credit.
  • The ERC does not apply to qualified wages taken into account as payroll costs in connection with a shuttered-venue-operators grant or a restaurant-revitalization grant for the second half of 2021.

Notice 2021-49 clarifies additional ERC issues

In response to practitioner questions, the IRS clarified the following issues:

  • Eligible employers are not required to include full-time equivalents in the count of full-time employees for purposes of determining whether an eligible employer is a large or a small employer. Wages paid to an employee who is not full-time, however, may be treated as qualified wages if all other requirements to treat the amounts as qualified wages are satisfied.
  • Cash tips treated as either IRC Section 3121(a) wages or IRC Section 3231(e)(3) compensation are treated as qualified wages if all other requirements to treat the amounts as qualified wages are satisfied. Eligible employers can receive both the ERC and the IRC Section 45B credit for the same wages. Although the Notice does not comment on this issue, it is unclear how a tip might be paid to an employee who is "not providing services."
  • To comply with the rule disallowing an employer's federal income tax deduction for qualified wages, taxpayers that claim ERCs on amended Forms 941 after filing their federal income tax return for the period should file an amended federal income tax return or administrative adjustment request if the appropriate disallowance was not taken on the original return.
  • Employers are not required to use the alternative quarter election consistently from quarter to quarter. In 2021, this election allows employers to compare their gross receipts for the prior quarter, rather than the current quarter, to the corresponding calendar quarter in 2019. For example, an employer could elect to be a Q2 2021 eligible employer if its Q2 2021 gross receipts are less than 80% of its Q2 2019 gross receipts and could then make an alternative quarter election in Q3 2021, again relying on the gross receipts decline in Q2 2021.
  • The availability of ERCs for wages paid to owner-employees and their spouses depends on whether they have other family members who are treated as owners under the IRC Section 267(c) attribution rules.


Notice 2021-49 will be of interest primarily to employers that may be eligible for ERCs in the second half of 2021, although it also clarifies certain discrete points that are relevant for prior periods.

This may be the last tranche of major ERC guidance. As explained previously, the ERC statutory provisions were divided into three periods: 2020 (CARES Act), the first half of 2021 (CAA) and the second half of 2021 (ARPA), each of which has now been covered by its own notice (Notice 2021-20, Notice 2021-23 and Notice 2021-49, respectively).

So far, the ERC statutory changes generally have expanded and extended the credit. But Congress may be reversing course. The publicly available text of the bipartisan infrastructure bill (Section 80604 of HR 3684) would terminate ERCs on September 30, 2021, effectively cutting the ARPA extension in half by eliminating ERCs for the fourth quarter of 2021. It is unclear how many employers would be affected. Some employers have determined that their eligibility for ERCs was limited to specific portions of 2020, while other employers remained eligible — or became newly eligible — in 2021. The pandemic itself continues to be unpredictable, leading to uncertainty about the effects it may continue to have on employers' gross receipts and the extent to which employers' operations may be suspended by governmental orders. Moreover, the bipartisan infrastructure bill has not been enacted; even if it is enacted, it might not be Congress's final word on ERCs. Perhaps tacitly acknowledging all of this, Notice 2021-49 states that the Treasury Department and the IRS "will continue to monitor potential legislation related to the [ERC] that may impact certain rules described in this [Notice]."


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 - Employment Tax Advisory Services
   • Kristie Lowery (
   • Kenneth Hausser (
   • Debera Salam (
National Tax – Accounting Periods, Methods, and Credits
   • Scott Mackay (
   • Kenneth Beck (
   • Susan Grais (
   • Rayth Myers (