Employee Retention Credit (ERC) Retroactive Termination

Claimed the employee retention credit (ERC) in the 4th quarter of 2021? Read about a retroactive change impacting the credit for the 4th quarter of 2021.

Background: The ERC was created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The American Rescue Plan Act (ARP Act) extended the ERC for wages paid through December 31, 2021.
Now the recently passed Infrastructure Investment and Jobs Act (IIJ Act) has retroactively repealed the ERC for the 4th quarter of 2021 for all taxpayers with the exception of recovery start-up businesses. A recovery start-up business is an employer that started 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.

Lots of businesses already claimed the employee retention credit for wages paid the 4th quarter of 2021 prior to the IIJ Act was passed in mid-November. Hence, aside from recovery start-up businesses, employers that have claimed a 4th quarter 2021 ERC will be needed to pay back advance payments but will not undergo any penalties. Internal revenue service Note 2021-65 offers advice on how to pay back any advance credit payments and how to prevent penalties.

Employers That Received Employee Retention Credit Advance Payments

If an employer applied for and obtained an advance payment of the ERC for wages paid in the 4th calendar quarter of 2021, and the employer is not a recovery start-up business, the employer needs to pay back the amount of the advance. Employers who should pay back these advance ERC payments have to do so by the due date for the applicable employment income tax return that includes the 4th calendar quarter of 2021.

Employers That Reduced 4th Quarter 2021 Employment Tax Deposits

Believing that they would receive an ERC for wages paid in the 4th quarter, some employers lowered their 4th quarter employment tax deposits prior to the ERC was repealed. The internal revenue service has stated that penalties will not be enforced for these employers that decreased 4th quarter 2021 employment tax deposits before December 21, 2021, if:

1. The employer decreased its deposits in anticipation of the ERC, consistent with the guidelines given in Notification 2021-24; and
2. The employer deposits the amounts initially kept in anticipation of the ERC on or prior to 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 differ 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 income tax return.

Failure to deposit penalties will not be waived for lowered deposits made after December 20, 2021.
Please contact MY CPA PRO if you require help correcting payroll for this modification