On November 15, President Biden signed The Infrastructure Investment and Jobs Act. Although the Act doesn’t include many tax provisions, it does make one important change to the Employee Retention Credit (ERC).
During the COVID-19 pandemic, many employers used the ERC, a valuable tax credit, to survive the economic downturn. However, the new legislation has now retroactively terminated the ERC before it was initially scheduled to end. Unless the employer qualifies as a “recovery startup business,” the ERC now applies only through September 30, 2021, instead of its initial end date of December 31, 2021.
As a result of the ERC sunsetting, some employers may face penalties if they retained payroll taxes in the belief that they would receive the credit. The American Institute of Certified Public Accountants (AICPA) has explained that these businesses will now need to pay back the payroll taxes they retained for any wages paid after September 30—and they may also be subject to a 10% penalty for failure to deposit payroll taxes withheld from employees.
Because of this, the AICPA is requesting that Congress direct the IRS to waive payroll tax penalties due to the early termination of the ERC. The IRS is expected to offer further guidance for employers handling compliance issues caused by the ERC sunsetting.
If your business had planned on receiving the ERC based on payroll taxes after September 30 and retained payroll taxes, contact us for help. We can help you determine how and when those taxes should be repaid and address any other tax compliance concerns.
The ERC
The ERC was originally introduced as part of the CARES Act in March of 2020 with the aim of encouraging employers to retain employees during the COVID-19 pandemic. The tax credit was later modified and extended to apply to wages paid before January 1, 2022.
For the third and fourth calendar quarters of 2021, eligible employers were allowed to claim the ERC against their share of Medicare taxes (1.45% rate) equal to 70% of the qualified wages paid per employee (this was subject to a limit of $10,000 of qualified wages per employee per calendar quarter).
A “recovery startup business” is an employer that is eligible to claim the ERC for the third and fourth quarters of 2021. Recovery startup businesses were defined under previous law as businesses that:
- Began operating after February 15, 2020
- Didn’t experience a significant decline in gross receipts and weren’t subject to a full or partial suspension under a government order (the eligibility requirement applicable to other employers)
- Had average annual gross receipts of under $1 million
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However, recovery startup businesses are still subject to certain limitations. For 2021, the maximum total credit is $50,000 per quarter for a yearly maximum credit of $100,000.
ERC sunsetting
Under the new infrastructure law, the ERC has been retroactively terminated and now applies only to wages paid before October 1, 2021, unless the employer qualifies as a recovery startup business. Other employers will no longer be able to claim the credit for wages paid in the fourth quarter of 2021.
The new law also alters the way recovery startup businesses are defined. For the purposes of ERC eligibility for the fourth quarter of 2021, a recovery startup business is now defined as one that:
- Began operating after February 15, 2020
- Has average annual gross receipts of under $1 million
There may also be other applicable changes for recovery startup businesses.
Next steps
If you were expecting to claim the ERC and have questions about how to proceed, contact us. We can explain your options and help you stay compliant and avoid penalties.