IRS Clarifies Guidance on 2021 Employee Retention Credit Termination

The Employee Retention Credit (ERC) was enacted under the March 2020 CARES Act to encourage businesses to keep employees on their payroll and was extended to last until the end of 2021.

On December 6, the IRS released IRS Notice 2021-65 related to the Infrastructure Investment and Jobs Act that retroactively terminated the Employee Retention Credit (ERC) as of September 30, 2021. IRS Notice 2021-65 addresses modifications for recovery startup businesses and provides additional clarification on how to handle advanced payments and employment tax deposits that were reduced to avoid potential penalties.

The early termination of the credit does not apply to recovery startup businesses; the notice also offers guidance for them.

Recovery Startup Business

A recovery startup business is a business that began operating after February 15, 2020, and has an average annual gross receipt under $1,000,000. This notice clarifies that recovery startup businesses can still qualify through December 31, 2021, by removing certain requirements.

Advance Payments

Employers who have requested advanced payments of the employee retention credit for the fourth quarter of 2021 prior to the enactment of the Infrastructure Act and no longer qualify, must repay the excess advance. Employers who repay the excess advance payment of the employee retention credit by the due date of the applicable employment tax return that includes the fourth calendar quarter of 2021 will not be subject to penalties. We expect this due date to be January 31, 2022, for most employers.

Reduced Employment Tax Deposits

Employers who have reduced employment tax deposits in anticipation of being eligible for the anticipated fourth-quarter ERC will not be subject to a penalty for failing to deposit employment taxes, if:

1. The deposit was reduced in anticipation of the ERC, consistent with the applicable rules from IRS Notice 2021-24; and
2. The employer deposits the amounts initially retained on or before the relevant due date for wages paid on December 31, 2021. This due date will vary based on the deposit schedule of the employer; and
3. The tax liability is properly reported on the applicable employment tax return or schedule.

Your BMF Advisor can help you determine the applicability of your unique situation. Contact us if you have questions about these changes or how your tax status could be affected.