IRS Issues Guidance about the Early Termination of the Employee Retention Credit

The Internal Revenue Service (IRS) recently provided guidance to employers about the early termination of the Employee Retention Credit (ERC). With recent legislative changes, unless the employer is a “recovery startup business,” the ERC is no longer available through the end of the 2021 calendar year and now applies only to wages paid after March 12, 2020, and before October 1, 2021. This retroactive change prompted the IRS to issue updated guidance for employers that have relied on the ERC for the fourth quarter of 2021.

The guidance applies to employers that paid wages after September 30, 2021, and either received an advance ERC payment or reduced their employment tax deposits in anticipation of claiming the ERC for the fourth quarter of 2021.

Background

The ERC, which is a fully refundable payroll tax credit for eligible employers that pay qualified wages (including health plan expenses) to some or all employees, was originally enacted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The American Rescue Plan Act of 2021 extended the ERC through the end of the 2021 calendar year, but, except for employers that qualify as a “recovery startup business,” the Infrastructure Investment and Jobs Act repealed the extension and ended the ERC on September 30, 2021.

A “recovery startup business” is a trade or business started after February 15, 2020, that generated gross receipts of no more than $1,000,000 during 2020. A recovery startup business is still eligible to claim the ERC on wages paid through December 31, 2021.

Repayment of Advance Payments

Employers (that are not recovery startup businesses) that received an advance payment of the ERC for wages paid in the fourth calendar quarter of 2021 must repay the amount of the advance by January 31, 2022 to avoid penalties.

Failure to Deposit Penalties

IRS Notices 2020-22 and 2021-24 provide employers relief from the failure to deposit penalty imposed by IRC Section 6656 for failing to timely deposit employment taxes to the extent that the amounts not deposited are equal to or less than the amount of refundable tax credits to which an employer is entitled under the Families First Act and the CARES Act. According to Notice 2021-65, unless an employer is a recovery startup business, the IRS will no longer waive the IRC Section 6656 failure-to-deposit penalty for payroll tax deposits due after December 20, 2021.

However, for payroll tax deposits due on or before December 20, 2021, with respect to wages paid in the fourth calendar quarter of 2021, employers will not be subject to a failure-to-deposit penalty on reduced deposits if:

1. The employer reduced deposits in anticipation of claiming the ERC consistent with the rules in Notice 2021-24;

2. The employer deposits the amounts initially retained on or before the relevant due date for wages paid on December 31, 2021 (regardless of whether the employer actually pays wages on that date); and

3. The employer reports the tax liability resulting from the termination of the ERC on a 2021 fourth quarter Form 941 or, if applicable, a 2021 Form 944.

For information about tax aspects of the ERC, contact us. We are here to help.

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