The IRS issued guidance on penalty relief for some employers who took the employee retention credit (ERC) on fourth quarter 2021 earnings.
The ERC was introduced in 2020 as part of The CARES Act. The credit was expanded and extended by the Consolidated Appropriations Act of 2021 (CAA) and American Rescue Plan Act of 2021 (ARPA).
In November of 2021, the passage of the Infrastructure Investment and Jobs Act (IIJA) ended the ERC retroactively, three months earlier than the anticipated December 31, 2021 end date. Most employers will not be able to use fourth quarter 2021 earnings to support the ERC, as the new measure pertains to calendar quarters after September 30, 2021.
There is an exception. If your business qualifies as a “recovery startup business” (a business that began carrying on trade or business after February 15, 2020 and had average annual gross receipts of less than $1 million), your organization is allowed to take the ERC through December 31, 2021.
Next steps for those who took the ERC
If you, as an employer, claimed an advance payment for wages paid after September 30, 2021, and received an erroneous refund, you have until the due date for the applicable employment tax return that includes the fourth quarter of 2021 (e.g., January 31, 2022 for Form 941 filers) to repay the erroneous refund. This is outlined in Notice 2021-65.
If you held back payroll tax deposits on fourth-quarter 2021 wages in anticipation of the ERC, on or before the relevant due date, you must report the liability and deposit the amounts initially retained on an applicable employment tax return that includes the fourth quarter of 2021 (regardless of whether your organization actually pays wages during that time). The relevant due date will vary based on the size of the tax payment due.
The relief provided under Notice 2021-65 does not apply to failure-to-deposit penalties for employers that reduce deposits after December 20, 2021 in anticipation of the ERC.
If you aren’t eligible for the relief provided by Notice 2021-65, you can also file for reasonable cause penalty relief.
The experts at MarksNelson are carefully watching ERC developments. Reach out to your advisor if you have any questions.