The IRS issued guidance this week on how businesses should handle the retroactive termination of the Employee Retention Credit (ERC).
The tax credit for wages paid, which was enacted by Congress under the Coronavirus Aid, Relief and Economic Security (CARES) Act and amended several times afterward, was supposed to last until the end of 2021. However, the federal infrastructure law signed into law Nov. 15 changed that, making the ERC applicable only for wages paid before Oct. 1.
The challenge for employers is that some who were expecting to receive the credit in the fourth quarter have been reducing payroll tax deposits, which are usually due monthly or semi-weekly depending upon the amount. Other employers may have received advance payments of the credit for fourth quarter wages.
Employers who received an advance payment of the ERC or reduced their employment tax deposits in anticipation of receiving the credit for Q4 of 2021 may repay or deposit the taxes owned without penalty if they do so by Dec. 20, according to IRS Notice 2021-65.
The fully refundable 2021 payroll tax credit for 70% of qualified wages (up to $7,000 for each employee) was available to eligible businesses that employed 500 or fewer full-time employees if the business had a greater than 20% reduction in gross receipts for the quarter compared to the same quarter in 2019.
To help pay for the bipartisan Infrastructure Act, Congress amended existing law to limit the ERC to wages paid before Oct. 1, 2021. Now only eligible employers that are a recovery startup business can continue to utilize the tax credit until Jan. 1, 2022.