The Employee Retention Tax Credit was created as part of the federal CARES Act in March of 2020 to provide certain employers suffering from severe pandemic-related economic effects with an employment tax credit to cover the wages and/or health insurance costs of eligible employees. The credit was supposed to expire at the end of 2020, but multiple pieces of federal legislation passed during 2020 and 2021 extended and expanded the credit through December 31, 2021. However, the federal Infrastructure Act, enacted on November 15, 2021, changed the credit’s end date again, retrospectively terminating it as of September 30, 2021, except for entities classified as “recovery startup businesses.”
As a result, some businesses may not have paid federal employment taxes for a portion of the 4th quarter of 2021 because they did not realize the law would change, making them ineligible for the tax credit for wages or health insurance costs paid on or after October 1, 2021. Additionally, employers may have requested advance payments of the employee retention credit for wages paid in the fourth calendar quarter of 2021. To help these employers, the IRS recently issued Notice 2021-65 related to the employee retention credit for the fourth calendar quarter of 2021.
According to the IRS guidance, if an employer already received an advance payment of any portion of the employee retention credit for the 4th quarter of 2021, it will be considered an erroneous refund that the employer must repay if they are not a recovery startup business. The date for repayment is when their applicable employment tax return that includes the fourth calendar quarter of 2021 is due. Employers should refer to the instructions on their employment tax form for additional information. Failure to repay the advance payment by the due date could result in tax penalties.
If an employer did not pay all their 4th quarter employment taxes in anticipation of receiving the retention tax credit through December 31, 2021, then they must pay those withheld taxes now. The IRS will stop waiving failure to deposit penalties for employers after December 20, 2021, unless the employer is a recovery startup business. For deposits for 4th quarter wages due on or before December 20, 2021, an employer that is not a recovery startup business will not be subject to a penalty if:
1. The employer reduced its deposits in anticipation of the employee retention credit; and
2. 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 (regardless of whether the employer pays wages on that date). Deposit due dates will vary based on the deposit schedule of the employer; and
3. The employer reports the tax liability resulting from employee retention credit termination on the applicable employment tax return.
Employers should refer to the applicable employment tax return instructions or schedule for additional information on tax liability.