Tax

Making the Most of the Employee Retention Credit 2021

02.02.2022

Emptech's founder, Jeff Aleixo

Author

Jeffrey Aleixo

employee retention credit 2021, tax credit compliance

The CARES Act created the Employee Retention Credit (ERC) to assist employers affected by the COVID-19 pandemic. While it was further expanded and modified under the Consolidated Appropriations Act, the Infrastructure Investment and Jobs Act accelerated the expiration of the Employee Retention Credit 2021 from December 31, 2021, to September 30, 2021, for most employers. 

On November 6, 2021, the IRS issued guidance for employers regarding the Employee Retention Credit 2021 for wages paid in the fourth quarter. Such guidance became necessary as the tax credit was terminated a quarter early. In addition to this, many eligible employers have already received advance payments of the ERC or reduced employment tax deposits in anticipation of the credit for the 4th quarter of 2021.

The ERC helped businesses keep employees on payroll during the economic challenges and uncertainties created by the COVID-19 pandemic. Even though it expired as of September 2021, opportunities continue to exist for businesses to retroactively claim the Employee Retention Credit 2021 for prior calendar quarters. Furthermore, some actions were already taken to undo the early termination of the ERC. A bipartisan group of Congressional representatives introduced H.R. 6161, the Employee Retention Tax Credit (ERTC) Reinstatement Act, to reestablish the ERC. Therefore, this is another reason for employers to claim the Employee Retention Credit 2021 and gain much-needed funds to help them address some of their pressing issues.

Use this detailed guide to find the best way to simplify the process of collecting, filing, and remitting payroll taxes while ensuring compliance with federal and state regulations.

Overview of the Employee Retention Credit 2021

The Employee Retention Credit was designed to encourage businesses to retain employees by providing a refundable tax credit equal to 50% of qualified wages. Initially, it was available for wages paid between March 12, 2020, and January 1, 2021, and was not available to employers who obtained a loan through the Payroll Protection Program (PPP). However, the Consolidated Appropriations Act introduced a modification to the CARES Act by allowing all eligible employers to claim the ERC, even if they have received a PPP loan. The Act also extended the ERC through Q2 2021.

The American Rescue Plan (ARP) further extended this program to the end of 2021, but the Infrastructure Investment and Jobs Act made an additional change to the Employee Retention Credit 2021. As a result, wages paid after September 30, 2021, are no longer considered eligible wages for ERC purposes. Also, recovery startup businesses, initially eligible for the ERC beginning on July 1, 2021, remain eligible to claim the ERC in the fourth quarter of 2021.

IRS Notice 2021-65

IRS Notice 2021-65 provides guidance reflecting a legislative change with regard to the Employee Retention Credit 2021, enacted with the Infrastructure Investment and Jobs Act. The notice generally addresses employers that paid wages in the fourth quarter of 2021 and received an advance payment of the ERC for those wages, or reduced employment tax deposits in anticipation of the credit for the fourth quarter of 2021. It also addresses how the rules apply to recovery startup businesses during the fourth quarter of 2021.

Pursuant to the November 2021 legislative changes, employers are not entitled to the employee retention credit for wages paid on or after October 1, 2021. Accordingly, Notice 2021-65 clarifies that the rules provided by the prior IRS guidance no longer apply for the fourth calendar quarter of 2021. It specifies that employers have to repay certain amounts of advance payments of the Employee Retention Credit 2021 prior to the enactment of the November 2021 legislation by the due date of their applicable employment tax return. 

Finally, due to the termination of the Employee Retention Credit 2021, Notice 2021-65 explains that the IRS will no longer waive the failure to deposit penalties for employers that reduce deposits in anticipation of the employee retention credit 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, these employers will not be subject to a penalty if certain conditions are satisfied, including:

  • The employer reduced deposits in anticipation of the employee retention credit, consistent with the rules in Notice 2021-24,
  • The employer deposits the amounts initially retained in anticipation of the employee retention credit on or before the relevant due date for wages paid on December 31, 2021, and
  • The employer reports the tax liability resulting from the termination of the employer’s employee retention credit on the applicable employment tax return or schedule that includes the period from October 1, 2021, through December 31, 2021.

Maximizing Benefits of the Employee Retention Credit 2021

The Employee Retention Credit 2021 has been one of the most lucrative opportunities available to many US businesses that have been financially impacted by COVID-19. Even though various updates and changes to the legislation resulted in the underutilization of this tax credit, businesses have received tens and hundreds of thousands of dollars in tax credits for the ERC. Ending the Employee Retention Credit 2021 early, in the middle of an extraordinarily challenging businesses environment, stops the process of rehiring employees and may result in additional layoffs. Therefore, it is not surprising that Congressional representatives support the reinstatement of this legislation in order to provide the certainty that businesses and their employees need.

Because of its frequent modifications and short lifespan, some employers may have missed opportunities to maximize the benefits of the Employee Retention Credit 2021, but they still have enough time to claim the credit. Furthermore, to ensure taking full advantage of the ERC, they can outsource the entire process and rely on expertise combined with innovative technology. Consequently, instead of dealing with calculations and eligibility considerations, employers can ensure effective management of the ERC nuances while staying compliant with IRS regulations to achieve long-term benefits to their businesses.

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