On December 6, 2021, the IRS issued guidance (Notice 2021-65) for employers regarding the retroactive termination of the employee retention credit (ERC). The notice also provides guidance regarding how the rules apply to recovery startup businesses during the fourth quarter of 2021.
Background
The ERC was originally available on wages paid by eligible employers through December 31, 2021. The Infrastructure Investment and Jobs Act (signed into law on November 15) retroactively terminated the ERC effective September 30, 2021, unless the employer is a “recovery startup business”. Accordingly, the ERC is no longer applicable to most wages paid after September 30, 2021.
Employers who anticipated receiving the ERC based on payroll taxes after September 30, 2021, but before the law was signed and either retained payroll taxes or received an advance payment of the ERC need to repay those amounts.
Employers who reduced employment tax deposits
Employers who reduced deposits on or before December 20, 2021, for wages paid during the fourth calendar quarter of 2021 in anticipation of the ERC and that are not recovery startup businesses will not be subject to a failure to deposit penalty with respect to the retained deposits if:
- The employer reduced deposits in anticipation of the Employee Retention Credit, consistent with the rules in Notice 2021-24,
- The employer deposits the amounts initially retained in anticipation of the Employee Retention Credit on or before 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 vary based on the deposit schedule of the employer, and
- The employer 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. Employers should refer to the instructions to the applicable employment tax return or schedule for additional information on how to report the tax liability.
Due to the termination of the ERC for wages paid in the fourth quarter of 2021 for employers that are not recovery startup businesses, failure to deposit penalties are not waived for these employers if they reduce deposits after December 20, 2021.
Employers who received advanced payments
Generally, employers that are not recovery startup businesses and received advance payments for the fourth calendar quarter of 2021 wages will avoid failure to pay penalties if they repay those amounts by the due date of their applicable employment tax returns.
Other relief
If an employer does not qualify for relief under this Notice, it may reply to a notice about a penalty with an explanation and the IRS will consider reasonable cause relief.
Additional information
Please contact your AGH tax advisor, Cindy McSwain or Shawn Sullivan using the contact information below to discuss your situation.
Senior Vice President
Outsourcing Services
Cindy McSwain leads AGH’s outsourcing services group. Her team provides payroll, accounting, funds disbursement, controller, and other financial outsourcing services to numerous clients throughout the U.S. Prior to joining the outsourcing group, Cindy served AGH’s audit clients for 10 years, working with a wide range of middle-market, closely held and family-owned organizations.
Her current clients cross many industry sectors, including manufacturing and distribution, restaurants, retailers, medical and not-for-profit. She has participated in numerous SEC filings and public registrations and has experience in mergers and acquisitions. Cindy is a certified public accountant and a member of both the American Institute of Certified Public Accountants and the Kansas Society of Certified Public Accountants.
Executive Vice President
Tax Services
Shawn leads the firm’s tax group and serves on AGH’s board of directors. In addition to enhancing business performance to minimize tax consequences, he has extensive experience in mergers and acquisitions, international tax and business structuring. Shawn has public and private experience in the fields of tax and accounting and works frequently with clients in the manufacturing, automotive, wholesale distribution, real estate development and construction industries.
A certified public accountant, Shawn is a member of the American Institute of Certified Public Accountants, the Kansas Society of Certified Public Accountants (KSCPA) and chairs the KSCPA Committee on Taxation.
NOTE: Any advice contained in this material is not intended or written to be tax advice, and cannot be relied upon as such, nor can it be used for the purpose of avoiding tax penalties that may be imposed by the IRS or states, or promoting, marketing or recommending to another party any transaction or matter addressed herein.