Congress Terminates the Employee Retention Credit Early

Congress Terminates the Employee Retention Credit Early

Employees line up


Infrastructure Investment and Jobs Act Summary

President Biden signed the Infrastructure Investment and Jobs Act (IIJA) into law 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 that chamber’s vote in favor of the Act to be delayed until late in the  evening of November 5, 2021, over a month after the 4th quarter began, which has created  a problem for employers who, based on prior law, were claiming the ERC for the 4th quarter  and were reducing their payroll deposits based upon the ERC. 


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Qualified Wages for Employee Retention Credit

Under the IIJA, employers are not qualified for the credit for wages paid after September  30, and thus employers should have been making their normal payroll deposits during  fourth quarter. IIJA includes no provision to deal with employers who were 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 and  reduced their payroll tax deposits prior to passage of the Act 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%.  


See this related post from Dennis Harabin2022 Tax Season: Another Hectic Year for IRS and Taxpayers?

This could be another rough tax season for the IRS and taxpayers. Although this year’s filing season opens January 24, 2022 (i.e., it is the first day the IRS will accept and start processing 2021 returns), the Service still has a backlog of prior year returns to process and is plagued by staff shortages due to the pandemic and reduced funding in the last few years. Even though the majority of 2020 returns were filed electronically, many of those returns still required manual review, resulting in significant delays in IRS issuing refunds. This was the case with millions of 2020 returns of taxpayers who received unemployment compensation and had filed before Congress passed a law that retroactively exempted up to $10,200 of 2020 unemployment income per filer (that provision has not been extended to 2021). Human review was also required for a significant number of returns on which the Recovery Rebate Credit had to be reconciled with the Economic Impact Payments #1 and #2.


The problems created by this issue may be magnified as some firms had taken 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, and the other by December  31, 2022. This, combined with having to make up for the unpaid 4th quarter 2021  employment taxes, may prove 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 contribute to their demise. 

Recovery Startup Business

There is an exception to the early termination of the ERC 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. 

Let’s hope the government does the right thing and waives the penalties for the 4th quarter  of 2021. Please call this office at 551-249-1040 for further details and assistance with dealing with this issue. 

Do you need more information? You can reach out to Dennis Harabin at Relax Tax today!

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