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IRS Issues Guidance on Retroactive Termination of Employee Retention Credit

December 08, 2021

Attention employers…if you received an advance payment of the ERC or reduced your employment tax deposits in anticipation of ERCs for the fourth quarter of 2021, read up on new guidance.

The IRS has released guidance regarding the retroactive termination of the ERC and how employers should handle wages paid after September 30, 2021. Here’s what you should know.

What is the ERC?

The Employee Retention Credit (ERC) was created under the CARES Act to provide financial relief to employers who kept workers on the payroll during the COVID-19 pandemic. Subsequent legislation expanded and extended the ERC through the end of 2021.

Though the ERC was originally set to expire at the end of the year, Congress decided early November (through the Infrastructure Investment and Jobs Act, or IIJA) that any wages paid after September 30, 2021 would be ineligible for the credit.

This November guidance stipulated that employers could still retroactively claim the ERC for qualified wages paid prior to September 30, 2021.

What’s new?

On December 6, 2021 the IRS issued guidance clarifying that eligible employers (not including recovery startup businesses) are permitted to repay or deposit taxes by the due date of their applicable employment tax returns without failure-to-deposit penalties. This applies to:

  • Employers who received an advance payment of the ERC or reduced their employment tax deposits (expecting to receive the ERC for the fourth calendar quarter of 2021).
  • Employers who paid wages after September 30th 2021
  • Employers who are ineligible for the credit due to the IIJA change

What should I do if this applies to me?

The failure-to-deposit penalty waiver is subject to three conditions:

  1. The employer must have reduced deposits in anticipation of claiming the ERC
  2. The employer must deposit the amounts it had retained (in anticipation of the ERC) on or prior to the relevant due date for employment taxes (with respect to wages paid on December 31, 2021). It does not matter whether or not the employer pays wages on that date).
  3. The employer must report the tax liability (due to the ERC termination) on the employment tax return or schedule that includes the period from October 1, 2021 through December 31, 2021.

What if I don’t qualify for relief under this notice?

The IRS will consider reasonable cause relief for employers who reply to a penalty notice with an explanation.

Questions? Contact us.

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