The Infrastructure Investment and Jobs Act (the “IIJA”), which was signed by President Biden on November 15, 2021, retroactively eliminates an employer’s ability to claim the employee retention credit (“ERC”) for eligible wages paid during the fourth quarter of 2021. The repeal of the ERC by the IIJA affects all employers that have reduced employment tax deposits or have requested an advance of the ERC for the fourth quarter of 2021. Below is an overview of the ERC and key considerations for employers.
Overview of the ERC
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) established a refundable employment tax credit for eligible employers paying qualified wages and health plan expenses. Originally, the covered period for the ERC under the CARES Act was March 13, 2020 to December 31, 2020. The Consolidated Appropriations Act, 2021 extended the ERC to include wages paid before July 1, 2021 and the American Rescue Plan Act of 2021 further extended the coverage period to include wages paid between July 1, 2021 and December 31, 2021. The IIJA eliminates the ERC for the fourth quarter of 2021, changing the end date of the credit to September 30, 2021 (unless the employer specifically qualifies as a “recovery startup business”).
Generally, eligible employers can fund the ERC by: (1) reducing the employer’s portion of employment taxes that otherwise would have been deposited, up to the amount of the anticipated credit, without penalty, or (2) requesting an advance of the ERC from the IRS for the amount of the credit that is not funded by reducing the employer’s portion of employment taxes.
Key Considerations for Employers
- Employers that have been actively claiming the ERC for prior quarters may have reduced their payroll tax deposits in anticipation of claiming the ERC for the fourth quarter of 2021. The retroactive expiration of the ERC means that these employers may have underpaid employment taxes, and as a result, may be subject to penalties and interest. Other employers may have requested an advance of the ERC from the IRS with respect to the fourth quarter of 2021. Employers should determine any underpaid tax amounts or advances with respect to the fourth quarter of 2021 and identify employment tax compliance issues.
- The IRS may issue guidance relating to this transition by providing relief from late deposit penalties and interest, and/or instructions on how employers are to pay back any credit advances against ERCs for the fourth quarter. However, no such guidance has been announced.
- Eligible employers that have not yet claimed any ERC should be aware that the credit cannot be claimed for the fourth quarter of 2021. However, employers may still claim the ERC for qualified wages paid between March 13, 2020 through September 30, 2021 by amending their quarterly employment tax returns (i.e., Forms 941-X, Adjusted Employer’s Quarterly Federal Tax Return of Claim for Refund).