The ERC was introduced by the CARES Act in 2020, expanded under the Consolidated Appropriations Act of 2021 (CAA), and extended under the American Rescue Plan Act of 2021 (ARPA). It was designed to encourage employers (including tax- exempt entities) to keep employees on their payroll and continue providing health benefits during the coronavirus pandemic.
Under the CAA and ARPA expansions, the ERC was expected to be available for all of 2021. But the Infrastructure Investment and Jobs Act (IIJA), signed by President Biden on November 15, ended the ERC retroactively as of September 30, 2021 for most employers, three months earlier than the December 31, 2021 end date. The IIJA measure applies to calendar quarters beginning after September 30, 2021; thus, employers generally will not be able to use any fourth quarter 2021 earnings to support the ERC.
One exception to the retroactive end date applies to employers who qualify as a “recovery startup business.” Those employers will still be allowed to take the ERC through December 31, 2021.
The new guidance–Notice 2021-65 –provides that employers that already claimed an advance payment of the credit for wages paid after Sept. 30 and received an erroneous refund on fourth quarter wages must repay any erroneous refunds by the due date for the applicable employment tax return that includes the fourth quarter of 2021 (e.g., January 31, 2022 for Form 941 filers).
Employers that held back payroll tax deposits on fourth-quarter 2021 wages in anticipation of the employee retention credit must deposit the amounts initially retained on or before the relevant due date for wages paid on December 31, 2021 (regardless of whether the employer actually pays wages on that date). The relevant due date will vary based on the size of the tax payment due. The employer also must report the tax liability attributable to the termination of the employer’s employee retention credit on the applicable employment tax return.
The relief provided under Notice 2021-65 does not apply to failure-to-deposit penalties for employers that reduce deposits in anticipation of the employee retention credit after December 20, 2021.
Employers can also file for reasonable cause penalty relief if not eligible for the relief provided by Notice 2021-65.
Recovery startup businesses remain eligible for employer retention credits during the fourth quarter of 2021.