The Internal Revenue Service (IRS) has released new guidance for employers focused on the retroactive termination of the Employee Retention Credit (ERC). The recently enacted Infrastructure Investment and Jobs Act amended existing legislation so that the ERC applies only to wages paid prior to Oct. 1, 2021, unless the employer is a recovery startup business. Employers that paid wages after Sept. 30, 2021, and either received advance payments of the ERC or reduced their employment tax deposits to prepare for the credit in the fourth quarter of 2021 are now ineligible for the credit due to the change in legislation.

Advance Payments

Employers that received advance payments for wages in the fourth quarter will not be subject to failure to pay penalties if they repay the amounts by the time their employment tax returns are due.

Reduced Employment Tax Deposits

Non-recovery startup businesses that reduced their deposits prior to Dec. 20, 2021, for wages they paid during the fourth quarter with the expectation of receiving the ERC will not be subject to failure to pay penalties if the following three conditions are met:

  1. The employer followed the reduced deposit rules in anticipation of receiving the ERC.
  2. The employer deposits the retained amounts on or before the due date for wages paid on Dec. 31, 2021, no matter if the employer pays the wages on that date. Deposit due dates will differ based on the employer’s deposit schedule.
  3. The employer reports the tax liability due to the termination of their ERC on the tax return including the fourth quarter of 2021. For more information on how to report the tax liability, employers can refer to the instructions on their applicable tax return.

Failure to deposit penalties will not be waived for employers if they reduce deposits after Dec. 20, 2021. If an employer doesn’t qualify for relief, they may reply to a penalty notice with an explanation and the IRS will weigh reasonable cause relief.

Should your organization have questions or need assistance in preparing its tax returns given this update, contact Doeren Mayhew’s business tax advisors today.