By: Justin Gubser, JD, CPA, Manager
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.
On November 5, 2021, the House of Representatives passed the Infrastructure Investment and Jobs Act, H.R. 3684 which President Biden signed on November 15, 2021. The bill is not the dramatic overhaul of the tax code that many have been expecting, which may be on its way in the future, but it does have some tax provisions.
Here we will focus on the update to the Employee Retention Tax Credit (ERC).
It is important to note that if your business was adversely affected by the COVID-19 pandemic and you have not looked further into your qualification for the Employee Retention Credit, contact your Blue & Co., LLC advisor. For a refresher on the rules governing your business’s qualifications and the Employee Retention Credit, please see this article.
ERC Updates from the Infrastructure Investment and Jobs Act
Under former law, the Employee Retention Credit for 2021 was available to all eligible employers for wages that were paid prior to January 1, 2022. Essentially making the credit available for all four quarters of 2021. The Infrastructure Investment and Jobs Act has eliminated the availability of the credit for the fourth quarter of 2021 for all otherwise eligible employers other than those that are considered a Recovery Startup Business.
- Note: Since the Employee Retention Credit was available to all eligible employers for the fourth quarter of 2021 under prior law, there have been many of those employers that have reduced their Federal payroll tax deposits in anticipation of the credit.
- The AICPA has recommended to Congress that there be measures put in place by the IRS and Treasury that eliminate any penalties for late payments of employment taxes as well as requesting that they establish a reasonable, practical method for the payment of those unpaid employment taxes. We will be closely monitoring for any updates on this.
There are special rules for the Employee Retention Credit that apply to Recovery Startup Businesses. Pursuant to the Infrastructure Investment and Jobs Act, the IRS now defines a Recovery Startup Business for the purposes of the ERC as an employer that:
- Began carrying on any trade or business after February 15, 2020; and
- Has average annual gross receipts that are under $1,000,000.
For those employers that meet the above qualifications to be considered a Recovery Startup Business, the credit remains available for the fourth quarter of 2021. There are other rules specific to Recovery Startup Businesses regarding the calculation and amount of Employee Retention Credit that is available. If you believe your business meets the qualifications, contact your Blue & Co., LLC advisor to determine your eligibility for the credit.
Other ERC Items to Note
Another important item not addressed in the Infrastructure Investment and Jobs Act is the timing of receiving a payment for Employee Retention Credit claims. As has been the case since the start of the pandemic, there is a significant delay in processing of items that are mailed to the IRS. Our original expectation was that the claims for credits on amended 941s (941Xs) would be processed and paid within 3-6 months of filing. So far, the timeline has been six months or greater, but we have started to see these refunds roll in for several of our clients. For those Employee Retention Credits that were claimed on originally filed Form 941’s we have seen that these have been processed and paid quicker than the amended forms.
The rules governing the Employee Retention Credit have been evolving since the start of the COVID-19 pandemic, causing much confusion for taxpayers. If you need help determining your business’s eligibility for the credit, calculating the credit, properly claiming the credit, or if you have any questions in between, please contact your Blue & Co., LLC advisor.