Congress Terminates the Employee Retention Credit Early

Curious about the employee retention credit? Here’s an overview of what it is, and some challenges it has caused.

President Biden signed the Infrastructure Investment and Jobs Act (IIJA) into law on November 15, 2021. One of the provisions of that legislation retroactively terminated the employee retention credit (ERC) early. The credit was previously available to eligible employers for wages paid through the end of 2021. Under this change the credit terminates after the third quarter.

Challenges Due to Early Termination of the Employee Retention Credit

Although the Senate passed the IIJA well before the 4th quarter of 2021 began, there was a delay. In fact, the chamber’s vote in favor of the Act was delayed over a month after the 4th quarter began. This created a problem for employers who, based on prior law, were claiming the ERC for the 4th quarter. Those employers were reducing their payroll deposits based upon the ERC.

Under the IIJA, employers will not qualify for the credit for wages paid after September 30. Thus employers should have been making their normal payroll deposits during fourth quarter. IIJA includes no provision to deal with employers who were planning to use the ERC to offset payroll taxes. Would employers who would have qualified now face late deposit penalties for the payroll taxes they failed to deposit? We don’t know. But we do realize one thing.

Without some financial relief, employers must find a way to deposit payroll taxes for the 4th quarter they thought was covered by the ERC. AND they may also be subject to penalties up to 10%.

Employee Retention Credit: Problems Magnified

The problems created by this issue may be magnified as some firms had taken advantage of a CARES Act provision. This provision allows the deferral of certain 2020 payroll taxes with the deferred amounts payable in two payments. The first payment would be due by December 31, 2021. While the second payment would be due by December 31, 2022. This, combined with having to make up for the unpaid 4th quarter 2021 employment taxes, may prove be a heavy burden for smaller employers. Although the ERC and payroll tax deferral was intended to help small firms struggling due to the pandemic it may have the opposite effect. Thus increasing the burden on these financially fragile businesses and perhaps contribute to their demise.

Exceptions to the Early Termination

There is an exception to the early termination of the ERC that applies to Recovery Startup Businesses. The Recovery Startup Businesses exception will be allowed to claim the credit through the end of 2021. A recovery startup business is an employer that began carrying on any trade or business after February 15, 2020. In addition, they must have gross receipts under $1,000,000 for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the employee retention tax credit is determined.

Let’s hope the government does the right thing and waives the penalties for the 4th quarter of 2021. Please call this office for further details and assistance with dealing with this issue.