Employers that took steps to get the employee retention credit (ERC) for the 4th quarter of 2021 got a rude awakening when Congress retroactively took it away as part of the Infrastructure Investment and Jobs Act, enacted on November 15, 2021. Under that law, the ERC applies only to wages paid before October 1, 2021, unless the employer is a recovery startup business.
This change has left many employers vulnerable to penalties–those that paid wages after September 30, 2021, and received an advance payment in anticipation of getting the 4th quarter credit but are now ineligible. To address this problem, the IRS has issued a Notice waiving penalties for these employers if they pay within certain deadlines, explained below. The Notice also describes how the ERC rules apply to recovery startup businesses during the fourth quarter of 2021.
Employers That Received Advance Payments
Employers that received advance payments for 2021 fourth quarter wages will avoid failure to pay penalties if they repay those amounts. The taxes must be repaid by the due date for the applicable employment tax return that includes the 4th calendar quarter of 2021. Failure to repay the advance payment on time may result in the imposition of failure to pay penalties by the IRS.
Employers That Reduced Employment Tax Deposits
Employers that reduced deposits on or before December 20, 2021, for wages paid during the fourth calendar quarter of 2021 in anticipation of taking the ERC will not be subject to a failure to deposit penalty if three criteria are met:
- The employer reduced deposits in anticipation of the ERC;
- The employer deposits the amounts initially retained on or before the due date for wages paid on December 31, 2021 (regardless of whether the employer actually pays wages on that date). Deposit due dates will vary based on the deposit schedule of the employer; and
- 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.
Be aware that failure to deposit penalties are not waived if employers reduce deposits after December 20, 2021.
IRS Will Consider Other Relief
If an employer does not qualify for relief under the Notice procedures described above, the employer still may be able to get penalties waived. The Notice states that employers in this situation should reply to the IRS with an explanation when they receive a penalty notice. The IRS will consider granting relief outside of the Notice procedures if the failure is due to reasonable cause.
Recovery Startup Businesses
Recovery startup businesses remain eligible for the 4th quarter of 2021 ERC. A “recovery startup business” is defined as a business starting operations after February 15, 2020, with annual gross receipts of less than $1 million. The Notice removes from the definition the requirement that a recovery startup business may not otherwise be an eligible employer due to a full or partial suspension of operations or a decline in gross receipts.
Conclusion
It is important to plan now to pay back any advance or reduction in employment tax deposits to avoid penalties. Consult your Frazier & Deeter tax advisor to help guide this process.