The Employee Retention Credit (ERC) was extended through December 31, 2021, under the American Rescue Plan Act of 2021 (ARP). However, the Infrastructure Investment and Jobs Act, which was signed by President Biden on November 15, 2021, retroactively terminated the ERC on wages paid after September 30, 2021 – unless the employer is a “recovery startup business.” The early sunset of the ERC has left employers who received advanced payments or have reduced their employment tax deposits in the fourth calendar quarter of 2021, on the hook to repay these amounts to avoid penalties.
On December 6th, 2021, the IRS released Notice 2021-65 which provides guidance on how to remedy the advanced payments received and the reduction to employment tax deposits claimed in the fourth calendar quarter of 2021.
Prior to the Infrastructure Investment and Jobs Act, employers may have requested advance payments of the ERC for wages paid in the fourth quarter of 2021. If the employer requested and received an advance payment of the ERC for wages paid in the fourth calendar quarter of 2021, and the employer is not a recovery startup business, the employer must repay the amount of the advance by the due date of their applicable fourth quarter employment tax return of 2021. Failure to repay such advance payment by the due date of the applicable employment tax return may result in the imposition of failure to pay penalties under section 6651.
Reduction of employment tax deposits:
Prior to the Infrastructure Investment and Jobs Act, in accordance with guidance provided in Notice 2021-24, employers may have reduced deposits of employment taxes by the amount of the ERC the employer anticipated for the fourth calendar quarter of 2021 based on a full or partial suspension of operations or a decline in gross receipts. If the employer decided to reduce employment tax deposits, they will have until December 20, 2021, to make the “catch-up” deposits to avoid penalties. Also, due to the early termination of the ERC, the IRS will no longer waive failure to deposit penalties for such reductions after December 20, 2021.
For deposits due on or before December 20, 2021, with respect to wages paid on or after October 1, 2021, but before January 1, 2022, an employer that is not a recovery startup business will not be subject to a penalty under section 6656 for failing to deposit employment taxes for the fourth calendar quarter of 2021 if –
- The employer reduced its deposits in anticipation of the employee retention credit, consistent with the rules provided in section 3.b. of notice 2021-24; and
- The employer deposits the amounts it had retained in anticipation of claiming the ERC on or before the relevant due date for employment taxes with respect to wages paid on December 31, 2021 (regardless of whether the employer pays wages on that date); and
- The employer reports the tax liability resulting from 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.
For employers that do not qualify for relief under this notice, the IRS will consider reasonable cause relief under section 6656(a) if the employers reply to a penalty notice with an explanation.
It’s important to coordinate with your payroll provider to make sure the company is taking the necessary steps to avoid penalties and to comply with paying employment taxes moving forward.
Please do not hesitate to contact your Maillie representative if you have any questions.