By: Aimee Reavling, CPA, Director
Update 12/14/2021: The IRS recently issued guidance with Notice 2021-65 providing relief to employers who were anticipating Employee Retention Credits for the fourth quarter of 2021 but are no longer eligible based on the elimination of the ERC with the Infrastructure Act. If employers follow the steps provided in the latest guidance, the IRS has stated that it will waive applicable penalties.
For those employers who had already requested advance payments of their ERC for the fourth quarter, they must repay those excess advance payments by the due date of their applicable employment tax return that includes the fourth quarter. Employers that have reduced their employment tax deposits in anticipation of the credit must discontinue this practice by December 20, 2021 and resume their required deposits for wages paid. For employment tax deposits that were due on or before December 20, 2021, an employer must deposit the unpaid amounts by the due date that would apply for wages paid on December 31, 2021. This due date applies regardless of whether the employer actually pays other wages on December 31st. The employer will also report the tax liability resulting from the termination of the ERC on its employment tax return.
This guidance provides the reasonable approach and much-needed clarity that employers have been looking for since the enactment of the Infrastructure Act on November 15.
Although the Infrastructure Investment and Jobs Act signed into law on November 15 did not contain much in the way of tax provisions, Congress did include one significant provision that has an impact on small businesses and employers adversely affected by COVID-19.
The Employee Retention Credit (ERC) was terminated early and was retroactively eliminated as of September 30, 2021, rather than the original date of December 31, 2021. This means that the ERC is no longer available for wages paid in the 4th quarter of 2021.
The ERC was originally enacted as part of the CARES Act, was expanded under the Taxpayer Certainty and Disaster Relief Act of 2020, and then was extended by The American Rescue Plan Act of 2021.
The elimination of the ERC so late in the 4th quarter could have a big impact on those employers that were relying on this relief to help keep their employees in the face of the continuing impacts of COVID-19. In addition, the retroactive elimination has created concern from those taxpayers who may have already requested advances of the credit or have reduced their payroll tax deposits in anticipation of the credit. These taxpayers would now have underpayments of their payroll tax and are subject to interest and penalties under the general rules in place today.
While no guidance has been provided to date, groups like the AICPA have been urging Congress and the IRS to provide relief from these penalties because the law was changed nearly halfway through the quarter. If you have questions or concerns about your payroll tax deposits as a result of the early elimination of the ERC, we encourage you to consult your Blue & Co. advisor.
Opportunity Remains to Claim Employee Retention Credits
Even though the Employee Retention Credit has expired at the end of September 2021, employers still have an opportunity to determine their eligibility and will have up to three years to claim the credit on an amended Form 941. For 2021, eligible employers can claim up to $7,000 per employee per quarter or $21,000 in total. The ERC is a fully refundable credit, meaning these amounts can be quite impactful to eligible employers.
As a reminder, there are several requirements that must be met to be eligible to claim the ERC. First, an employer must determine whether it is an eligible employer based upon a government shutdown impacting its operations or a significant decline in its gross receipts. For 2021, a significant decline in gross receipts means a decline of 20% or more in the gross receipts in the quarter (or immediately prior quarter) as compared to the same quarter in 2019. This is a determination that should be reviewed closely to ensure that the analysis is done correctly based upon the employer’s tax method for recognizing gross receipts.
Next, an employer needs to determine whether it is a small or large employer. For 2021, a small employer is one that had an average number of full-time employees in 2019 of 500 or less. Small employers may include all eligible wages paid in a quarter while a large employer may only include certain wages paid to employees while they are not working.
Finally, an employer must ensure that any wages used for Paycheck Protection Program (PPP) forgiveness are excluded from wages used in the ERC analysis. If the employer has not yet applied for PPP forgiveness, there are planning opportunities that may be available to maximize the relief available under each of these programs.
The analysis and calculations related to the Employee Retention Credit can be complicated, but can also provide significant relief for employers. It’s important that you contact your Blue & Co. advisor to ensure that you uncover available opportunities to claim the ERC and to maximize the credits available.
Aimee Reavling, CPA