As the name suggests, the Employee Retention Tax Credit (ERTC) was designed to provide a financial incentive to business owners that kept workers on the payroll during the COVID pandemic. When combined with the popular Paycheck Protection Program (PPP), it became an especially potent means of financial support. This is due in part to the various changes made to the ERTC over the last 18 months.
Unfortunately, businesses were greeted with bad news when the Infrastructure Investment and Jobs Act passed as it called for an early end to the ERTC. Rather than expiring on December 31, 2021, the ERTC is no longer available for wages paid after September 30, 2021. To help guide businesses, the IRS issued Notice 2021-65 which provides important information to consider moving forward. To help clients, prospects, and others, Selden Fox has provided a summary of the key details below.
Employers will recall that rules for the ERTC changed between 2020 and 2021. In 2020, the maximum amount of the credit was $5,000 per employee—50 percent of the first $10,000 in eligible wages, annually. In 2021, the credit was expanded considerably. Employers have had most of the year in which to claim up to $7,000 per employee—70 percent of the first $10,000 in eligible wages per quarter. It was supposed to generate as much as $28,000 per employee for the whole year with the added benefit of usability at the same time as forgiven PPP funds (provided those funds were not used for the same payroll). Now that the program has ended, the most that an employer can claim per employee is $21,000.
Many had been counting on the ERTC for the fourth quarter, too. As such, tax planning strategies may have had them withholding payroll tax deposits in advance of receiving the credit. Some employers may have even received an advance payment from the IRS before the program was cancelled. The information contained in the Notice provides important details for those in both scenarios.
Early Payroll Withholding
In one potential scenario, employers may have withheld payroll tax deposits for the fourth quarter fully expecting to receive the ERTC. Up until this point, the IRS was waiving failure to deposit penalties if an employer expected to receive the credit based on either of the qualifying tests.
For the fourth quarter, there are three exceptions to the penalty for failing to deposit payroll taxes. They are:
- If the employer’s decision to withhold payroll tax deposits was consistent with previous guidance.
- If the employer deposits any amounts initially withheld by its deposit date for wages through December 31, 2021, and
- If the employer reports any corresponding tax liability from the early termination on their employment tax return.
Any payroll tax deposits withheld after December 20, 2021, will be subject to fines and penalties.
Advance ERTC Payments
Some employers had already requested advance payments of the ERTC based on projections. Since these requests would have been made before the infrastructure bill modified the ERTC program, employers had no way of knowing that the advance payments could not be claimed. In these situations, if an employer received an advance payment of the ERTC for the fourth quarter, that money either needs to be returned to the IRS or be repaid. If the check isn’t cashed yet, don’t cash it. If the employer already deposited the check, all the funds for the fourth quarter must be repaid.
The due date for repayment is when the employer would otherwise file its employment tax return. This deadline varies; a list of due dates is available here.
Exception to ERTC Early Termination
For most, the ability to claim the ERTC for the whole year has been cut short. The only exception to the early termination is the Startup Recovery Provision. It applies to new companies that began operations since February 2020 and have gross receipts under $1 million. Unlike previous versions of the ERTC, there is no gross receipts decline, or government-imposed shutdown qualifications. All employee wages qualify for purposes of claiming the credit, and it doesn’t matter how many employees work for the business. Unlike the other parts of the ERTC, the Recovery Startup eligible businesses can only claim the credit in the third and fourth quarters of 2021.
Although there are no more quarters in which qualifying wages can be paid, local businesses can still retroactively claim the credit starting with the second quarter of 2020. For this reason, it is important to consult with a qualified tax advisor to assess your situation and identify if potential savings exist. If you have questions about the information outlined above or need assistance with an ERTC issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.