The Internal Revenue Service (IRS) has issued guidance (Notice 2021-65) regarding the retroactive termination of the Employee Retention Tax Credit (ERTC). The recently enacted Infrastructure Investment and Jobs Act terminated the ERTC with retroactive effect to Sept. 30, 2021 (i.e., wages paid after that date do not qualify for the ERTC, unless the employer is a recovery startup business).
Notice 2021-65 applies to employers who paid wages after Sept. 30, 2021, and either received advance payments of the ERTC for such wages or reduced employment tax deposits in anticipation of the credit for the fourth quarter of 2021 but are now ineligible due to the Infrastructure Investment and Jobs Act.
Background:
Originally introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, the American Rescue Plan Act of 2021 extended the availability of the ERTC through wages paid through Dec.31, 2021.
Generally, for 2021 the employers were eligible for the ERTC based on whether they experienced at least a partial suspension of operations due to government restrictions related to COVID-19, or incurred declines in gross receipts of more than 20 percent compared to the same calendar quarter in 2019 (or 2020, in some cases). Up to $10,000 in wages per employee was eligible for the credit each quarter, and the credit was 70 percent of qualified wages (i.e., the total possible ERTC was $7,000 per employee per quarter in 2021). Employers were able to take the credit by filing IRS Form 7200 to request a payment, or by reducing federal employment tax deposits by any ERTC amount for which the employer was eligible.
IRS Notice 2021-65:
Employers That Received Advance Payments
Employers were able to request advance payments of the ERTC by filing a Form 7200. Employers that received advance payments of the ERTC for wages paid during the fourth quarter of 2021 must repay those amounts to the IRS by the due date of their applicable employment tax returns; i.e., generally by Jan.31, 2022.
Employers That Reduced Employment Tax Deposits
Employers that reduced deposits for wages paid during the fourth calendar quarter of 2021 in anticipation of the ERTC will be required to repay (deposit) the amounts retained on or before the due date for wages paid on Dec. 31, 2021 (regardless of whether the employer actually pays wages on that date). For semiweekly depositors, this would generally be Jan. 3 or Jan. 5, 2022, depending on whether the accelerated next-day deposit requirement for liabilities of $100,000 or more is met.
The IRS guidance concerning how to report the tax liability associated with ERTC reversals referred employers to the instructions to the applicable employment tax return or schedule (i.e., Form 941 Schedule B, Report of Tax Liability for Semiweekly Schedule Depositors). The schedule and instructions have not been released as of December 8, 2021. Consequently, employers should monitor IRS guidance for details. Depending on the IRS instructions for how to report the tax liability associated with ERTC reversals, the IRS may or may not issue proposed penalties for apparent late deposits of employment taxes. In accordance with Notice 2021-65, proposed penalties related to deposits due prior to Dec. 21 would be waived upon request, but IRS penalty notices may be issued, and if so, employers would need to diligently respond to explain the circumstances and ask that the penalty be waived.
Generally, employers should have ceased applying ERTC amounts to deposits once the Infrastructure Investment and Jobs Act was signed (Nov. 15, 2021). However, to provide appropriate time for employers to learn about the change and adjust their systems, Notice 2021-65 specifies that no penalties will apply for employers that reduced deposits of Employment Taxes by the amount of an anticipated ERTC for deposits due on or before Dec. 20, 2021. Employers that reduce deposits after Dec. 20, 2021, in anticipation of the Employee Retention Credit, will be subject to failure to deposit penalties, which will not be waived.
Recovery Startup Businesses Continue to Be Eligible for ERTC Through Dec. 31, 2021
Section 3134(c)(5) defines a "recovery startup business" as an employer that began carrying on a trade or business after Feb. 15, 2020, for which the average annual gross receipts do not exceed $1,000,000, and that is not otherwise an eligible employer due to a full or partial suspension of operations or a decline in gross receipts. A recovery startup business is permitted a credit of no more than $50,000 per quarter in the third and fourth quarters of 2021.
Action Required:
- Other than recovery startup businesses, employers should cease applying any ERTC amounts to pay dates after Sept. 2021.
- Any ERTC credits applied after September must be reversed and paid to the IRS at this time.
ADP Tax Filing Service clients will receive a separate communication explaining the funding and repayment process for ERTC amounts applied after September 2021. ADP Tax Filing Service clients who requested and received advance payments via Form 7200 will need to coordinate this information with ADP.
Next Steps:
ADP will monitor for IRS instructions for reporting ERTC reversal liabilities. Depending on such guidance from the IRS, late deposit penalties may apply to any ERTC amounts applied after September. If such notices are issued, employers would need to diligently respond to explain the circumstances and ask that the penalty be waived. ADP will publish additional details as soon as possible. [JM(1]
Please contact your dedicated service professional with any questions.