December 28, 2021

Guidance and Relief for Employers after Retroactive Employee Retention Credit Termination

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On December 6, 2021, the Internal Revenue Service (IRS) issued Notice 2021-65, providing much-needed guidance to employers regarding the early termination of the Employee Retention Credit (ERC) under the Infrastructure Investment and Jobs Act. Per the Infrastructure Act, the ERC is only applicable to wages paid before October 1, 2021 (except in circumstances involving “recovery startup businesses”),¹  rather than the initial December 31, 2021 cutoff. In fairness, this retroactive termination required retroactive relief for employers who had already acted with the original duration of the credit in mind. 

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The relief measures in Notice 2021-65 are applicable “to employers that paid wages after September 30, 2021, and received an advance payment of the Employee Retention Credit 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 credit due to the change in the law.”² First, employers that received advanced ERC payments for the 2021 fourth quarter “will avoid failure to pay penalties if they repay those amounts by the due date of their applicable employment tax returns.”³ Second, employers that reduced deposits on or before December 20, 2021, for wages paid in the final quarter of 2021 in anticipation of the ERC will avoid failure to deposit penalties with respect to such retained deposits if all of the following are met:

  1. The employer reduced deposits in anticipation of the ERC (consistent with the rules in Notice 2021-24).
  2. The employer deposits the amounts initially retained in anticipation of the ERC 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). Note that deposit due dates will vary based on employers’ deposit schedules.
  3. The employer reports 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. Note that employers should refer to the instructions of the applicable employment tax return or schedule for additional information on how to report the tax liability.⁴

For those employers (again, excluding “recovery startup businesses”) that reduced deposits after December 20, 2021, failure to deposit penalties will not be reduced.

Conclusion

Notice 2021-65 is welcome relief and practical guidance for employers affected by the early sunset of the ERC. The Notice indicates that the IRS will consider employers’ requests for reasonable cause relief if they are not otherwise eligible for relief under the Notice 2021-65 provisions. So, if you’ve already reduced your deposits and have questions and concerns, Notice 2021-65 may provide you with the answers and relief that you need. Frost Law is here to help you make sense of it all and ensure you don’t incur unnecessary penalties. For any questions concerning the ERC, Frost Law can assist with giving guidance on what actions you can take. Give us a call at (410) 497-5947 or schedule a free initial consultation with our brief contact form.

Footnotes

  1. For the remainder of this article, the term “employer” will refer only to non-recovery startup business employers. If you want to learn more about guidance specific to recovery startup businesses, reach out to our Frost Law team.
  2. IR-2021-242 (Dec. 6. 2021).
  3. Id.
  4. Id. Note that if an employer has retained an amount equal or greater than $100,000, the Next-Day Deposit Rule will apply. As stated in Notice 2021-65, footnote 8: “If the amounts initially retained in anticipation of the employee retention credit total $100,000 or more with or without any additional liability on that date, then the employer is subject to the $100,000 One-Day rule of § 31.6302-1(c)(3) (also referred to as the “Next-Day Deposit Rule”).”
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