IRS Issues Guidance on the Employee Retention Credit Termination
Note: The IIJA did not change the due date for applying for the ERC for quarters prior to the fourth quarter of 2021. The final due date for such an application is the last day on which an amended payroll tax return for a given quarter may be filed. That date is generally three years after the date on which the Form 941 for the quarter being amended was filed, or two years from the date the tax due for that quarter was paid.
IRS Notice 2021-65 provides guidance to employers that paid wages after September 30, 2021, and received advanced ERC payments for those wages or reduced employment tax deposits in anticipation of the credit for the fourth quarter of 2021 but are now ineligible for the ERC due to the retroactive termination.
Employers that received advance ERC payments can avoid failure to pay penalties by repaying the amounts by the due date of their applicable employment tax returns.
Employers that reduced employment tax deposits on or before December 20, 2021, for wages paid during the fourth quarter of 2021 in anticipation of the ERC will not be subject to a failure to deposit penalty related to the retained deposits if they:
- Reduced deposits in anticipation of the ERC, consistent with the rules in Notice 2021-24;
- Deposit the amounts initially retained 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
- Report the tax liability resulting from the termination of the employer’s ERC on the applicable employment tax return or schedule that includes the period from October 1, 2021, through December 31, 2021. Refer to the instructions to the applicable employment tax return or schedule for additional information on how to report the tax liability.
The IRS noted that since the ERC was terminated for wages paid in the fourth quarter of 2021, failure to deposit penalties will not be waived for employers that reduce deposits after December 20, 2021, and are not recovery startup businesses.
The IIJA defines a “recovery startup business” as a business that:
- Began carrying on any trade or business after February 15, 2020; and
- Had average annual gross receipts of less than $1 million.
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