The Infrastructure Investments and Jobs Act made a big change in the employee retention tax credit (ERC). The ERC now applies only to wages paid before October 1, 2021, unless the employer is a recovery startup business.
Many employers have started to take advantage of the ERC for wages paid in the fourth quarter either by claiming an advance payment or by reducing their employment tax deposits in anticipation of the credit for the fourth quarter.
IRS Notice 2021-65 provides guidance for how employers that received advance payments can return the money and when. It also explains how businesses that reduced payroll tax deposits in anticipation of receiving the credit can avoid penalties.
Employers who received advance payments
Generally, employers that are not recovery startup businesses and received advance payments for fourth-quarter wages of 2021 will avoid failure-to-pay penalties (under section 6651) if they repay those amounts by the due date of their applicable employment tax returns.
Employers who reduced employment tax deposits
For employers that reduced deposits, expecting to claim the ERC in that quarter, the IRS said it would waive penalties if the employer:
- Followed rules to claim the anticipated credit under Notice 2021-24;
- Deposits the amounts they retained on or before the due date for wages paid on December 31, 2021, regardless of whether they actually pay wages on that date (deposit due dates will vary based on the deposit schedule of the employer); and
- Reports the tax liability resulting from the termination of the employer's employee retention credit on the applicable employment tax return or schedule that includes the period from October 1, 2021, through December 31, 2021.
Businesses have only until December 20 to follow these rules. Any reduction of employment tax deposits after that date for anticipated employment tax credits will be subject to failure-to-deposit penalties under IRC 6656.
If you have any questions about the ERC or your organization’s next steps, contact Wipfli for assistance.
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