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How Retroactive Termination of the Employee Retention Credit Works?

an employer doing paperworks

Article Highlights: 

  • Employee Retention Credit
  • Infrastructure Investment and Jobs Act
  • Retroactive Repeal of 4th Quarter Employee Retention Credit
  • Advance Payments
  • 4th Quarter Employment Tax Deposits
  • Failure to Deposit Penalties

If you claimed the employee retention credit (ERC) in the fourth quarter of 2021, you better read this about a retroactive change affecting the credit for the fourth quarter of 2021. 

Employee Retention Credit (ERC) 

Background: The ERC was created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and the American Rescue Plan Act (ARP Act) extended the ERC for wages paid through December 31, 2021. 

Cares Act Update

Now the recently passed Infrastructure Investment and Jobs Act (IIJ Act) has retroactively repealed the ERC for the fourth quarter of 2021 for all taxpayers except recovery start-up businesses.  A recovery start-up business is an employer that began carrying on any trade or business after February 15, 2020, and has gross receipts under $1,000,000 for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the ERC is determined.

Many businesses already claimed the ERC for wages paid in the fourth quarter of 2021 before the IIJ Act was passed in mid-November. Thus, other than recovery start-up businesses, employers that have claimed a fourth quarter 2021 ERC will be required to repay advance payments but will not be subject to any penalties. IRS Notice 2021-65 provides guidance on how to repay any advance credit payments and how to avoid penalties.    

Employers That Received Advance Payments - If an employer requested and received an advance payment of the ERC for wages paid in the fourth calendar quarter of 2021, and the employer is not a recovery startup business, the employer must repay the amount of the advance. Employers who need to repay these advance ERC payments must do so by the due date for the applicable employment tax return that includes the fourth calendar quarter of 2021.

Employers That Reduced Fourth Quarter 2021 Employment Tax Deposits – Thinking that they would qualify for an ERC for wages paid in the fourth quarter, some employers reduced their fourth quarter employment tax deposits before the ERC was repealed. 

Failure to Deposit Penalty

The IRS has said that penalties will not be imposed for these employers that reduced fourth quarter 2021 employment tax deposits prior to December 21, 2021, if:

  1. The employer reduced its deposits in anticipation of the ERC, consistent with the rules provided in Notice 2021-24; and 
  2. The employer deposits the amounts initially retained in anticipation of the ERC 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). Deposit due dates will vary based on the deposit schedule of the employer; and 
  3. The employer reports the tax liability resulting from the termination of the employer’s ERC on the applicable employment tax return.  

Failure to deposit penalties will not be waived for reduced deposits made after December 20, 2021.

Please contact this office at 551-249-1040 if you need assistance correcting payroll for this change.

Recommended Readings:

  • Congress Terminates the Employee Retention Credit Early
  • Employers Hiring New Employees May Be Able to Claim a Work Opportunity Tax Credit
  • Why Am I Getting A Letter From The IRS?
  • 7 Different Types of Income Streams for Your Business
  • Unemployment Tax Exclusion: Will IRS Process Refunds Automatically?

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