On November 15, 2021, the House of Representatives passed H.R. 3684, the Infrastructure Investment and Jobs Act, which was signed into law by President Biden on November 15th. One of this legislation’s key aspects is the early termination of the Employee Retention Tax Credit that was first created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and has been amended several times since its enactment. As a result, the Employee Retention Tax Credit expires three months earlier than scheduled. It will not be available for the fourth quarter of 2021 and the third quarter of 2021 will be the final quarter for which an employer can claim the credit.
Employee Retention Tax Credit Overview
The Employee Retention Tax Credit was established in March 2020 to encourage employers to keep their employees on the payroll. It started as a fairly limited benefit mainly because businesses obtaining a Paycheck Protection Program (PPP) loan could not claim the ERC and it was scheduled to last until the end of 2020.
However, the Consolidated Appropriations Act of 2021 (CAA) expanded the Employee Retention Tax Credit, making it available to businesses that received a PPP loan and extending it through the second quarter of 2021. Finally, the American Rescue Plan Act of 2021 (ARPA) further expanded the Employee Retention Tax Credit, codifying it into Section 3134 of the Internal Revenue Code of 1986, as amended, and extending the ERC through the end of 2021. The ARPA also added special rules that apply to a severely distressed employer or a recovery startup business.
The Employee Retention Tax Credit is a refundable payroll tax credit claimed quarterly that can provide reductions to payroll taxes or cash refunds. Some of its other provisions are:
- It is available to both for-profit and not-for-profit employers, but not every business is eligible;
- It involves two tests for eligibility – a partial or total government-ordered shutdown, or the applicable decline in gross receipts. The decline in gross receipts test is based on a significant decline in gross receipts in quarters of 2020, more than 50%, and 2021, more than 20%, compared with the same quarter in 2019;
- There are two categories of eligible employers, based on the average number of full-time employees in 2019 before the COVID-19 pandemic;
- There are different rules for 2020 and 2021. For wages paid after March 12, 2020, and on or before December 31, 2020, the credit is equal to 50% of qualified wages with a $10,000 maximum per employee for the year 2020. For wages paid between January 1, 2021, through September 30, 2021, the credit increases to 70% of qualified wages, but the $10,000 maximum per employee is considered for each quarter. As a result, the maximum credit is $7,000 per quarter or $21,000 for three quarters.
- There is no cap on the number of employees that are paid in any quarterly period for purposes of the Employee Retention Tax Credit.
Eligible employers can claim the Employee Retention Credit for each calendar quarter on their federal employment tax returns.Use this detailed payroll tax guide to stay on top of collecting, filing, and remitting payroll taxes and ensure compliance with federal and state regulations.
Impact of the Infrastructure Investment and Jobs Act
Under the Infrastructure Investment and Jobs Act, the Employee Retention Credit expires three months earlier than scheduled, instead of allowing businesses to use it through the end of 2021. The early termination of the credit is retroactive to October 1, 2021, and does not provide for any penalty relief for companies that have been monetizing the credit as wages are paid.
With the Employee Retention Tax Credit ending, businesses will need to pay back the payroll taxes retained to cash in their anticipated credit and there will be a 10% penalty if companies fail to deposit payroll taxes previously withheld from employees. However, the Infrastructure Investment and Jobs Act does not prevent eligible employers from retroactively filing for the credit when it comes to wages paid between March 12, 2020, and September 30, 2021. They can do this by filing an amended Form 941-X before the statute of limitations expires for the filing of an amended return.
Also, businesses qualifying as eligible recovery startup businesses will still be eligible to receive the Employee Retention Tax Credit for the fourth quarter, as long as the business was started after February 15, 2020, and its gross receipts do not exceed $1 million.
Taking Necessary Steps in Response to ERC Ending
The repeal of the Employee Retention Tax Credit will affect employers that anticipated receipt of the credit during the fourth quarter of 2021. Apart from recovery startup businesses, employers should not apply any Employee Retention Tax Credit amounts to payroll pay dates after September. Furthermore, any Employee Retention Tax credits applied to pay dates after September have to be reversed and paid to the Internal Revenue Service (IRS).
To comply with recent changes, companies need to evaluate their tax position as soon as possible and avoid any adverse tax impacts to their business. In addition to this, Employee Retention Tax Credits are valuable and likely to be misunderstood and misapplied. While there is no clear guidance on audit procedures or thresholds from the IRS, there is a high possibility of IRS audits in the next five years. Therefore, employers should prepare detailed support for their ERC qualification and credit calculations as well as review and update their ERC documentation. Using tax management software solutions simplifies the entire process and helps employers meet the necessary requirements for the ERC and other associated programs. As a result, they can get audit-ready deliverables, and prevent costly mistakes.Ensure meeting filing deadlines and deposit requirements while saving time spent on administrative complexities of payroll taxes to run and grow your business.