Updated: Dec 10, 2021
President Biden signed the Infrastructure Investment and Jobs Act (IIJA) on November 15, 2021. One of the provisions of that legislation retroactively terminated the employee retention credit (ERC) early. The credit was previously available to eligible employers for wages paid through the end of 2021. Under this change, the credit terminates after the third quarter. Although the Senate passed the IIJA well before the 4th quarter of 2021 began, issues in the House caused the vote to be delayed until late in the evening of November 5, 2021. This has created a problem for employers who, based on prior law, were claiming the ERC for the 4th quarter and reducing their payroll deposits based upon the ERC.
Under the IIJA, employers are not qualified for the credit for wages paid after September 30, and thus employers should have been making their regular payroll deposits during the 4th quarter. IIJA includes no provision to deal with employers planning to use the ERC to offset payroll taxes. For now, it's not clear if employers who would have qualified due to the drop in gross receipts tests, or full/partial suspension of operations test, will face late deposit penalties for the payroll taxes they failed to deposit.
If neither Congress nor the IRS provides relief, employers will not only have to deposit payroll taxes for the 4th quarter they thought were covered by the ERC, they may also be subject to penalties up to 10%. The problems created by this issue may be magnified as some firms took advantage of a CARES Act provision allowing the deferral of certain 2020 payroll taxes with the deferred amounts payable in two payments, one by December 31, 2021, the other by December 31, 2022. This, combined with having to make up for the unpaid 4th quarter 2021 employment taxes, may prove to be a heavy burden for smaller employers.
Although the ERC and payroll tax deferral was supposedly intended to help small firms struggling because of the COVID pandemic, it may have the opposite effect by increasing the burden on these financially fragile businesses and perhaps contributing to their demise.
There's an exception to the early termination that applies to Recovery Startup Businesses that will be allowed to claim the credit through the end of 2021. A recovery startup business is an employer that began carrying on any trade or business after February 15, 2020, and has gross receipts under $1,000,000 for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the employee retention tax credit is determined.
Don't hesitate to call our office for further details and assistance with dealing with this issue.