The Infrastructure Investment and Jobs Act (IIJA), which President Biden signed into law November 15, will retroactively end the employee retention credit (ERC) on September 30, 2021 for most employers.
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 is 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 IIJA ends the ERC on September 30, 2021 for most employers, three months earlier than the December 31, 2021 end date. The IIJA measure would apply to calendar quarters beginning after September 30, 2021; thus, employers generally would not be able to use any fourth quarter 2021 earnings to support the ERC.
The exception to the retroactive end date is for employers who qualify as a “recovery start up business.” Those employers would still be allowed to take the ERC through December 31, 2021.
ERC Background
The ERC is a refundable payroll tax credit for wages and health plan expenses paid or incurred by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or where the employer experienced a significant reduction in gross receipts.
The CAA extended the ERC eligibility period to June 30, 2021, increased the ERC rate from 50% to 70% of qualified wages and increased the limit on per-employee wages from $10,000 for the year to $10,000 per quarter ($50,000 per quarter for start-up businesses). In addition, employers that received a Paycheck Protection Program (PPP) loan were no longer prohibited from claiming the ERC even if they previously filed payroll tax returns without claiming the credit.
The ARPA extended the ERC for another six months to December 31, 2021 under similar terms as provided in the CAA, but the IIJA ends the ERC on September 30, 2021 for most employers. Since most 2021 PPP loans were received early in the year, with covered periods spanning most of the second and third quarters, the fourth quarter wages were most beneficial to many employers looking for 2021 ERC.
Insights:
Employers that have been shorting payroll tax deposits in the fourth quarter of 2021 in anticipation of receiving the ERC should work with their payroll service provider and/or payroll department to make sure that they resume making full payroll tax deposits going forward. The IRS is expected to issue guidance regarding how to handle the repayment of the underpaid taxes and other compliance issues that may arise because of the retroactive termination of the ERC.
The loss of the fourth quarter wages for ERC might require additional scrutiny for PPP loan borrower who cannot use wages during the covered period for both PPP loan forgiveness and ERC.
If you have questions about the ERC or other tax issues, contact HFM today. Our tax professionals are well versed on the latest guidance to provide our clients with professional, personalized services.