IRS Issues Guidance on Retroactive Termination of the Employee Retention Credit

Update: IRS Issues Guidance on Retroactive Termination of the Employee Retention Credit

On November 15, 2021, the Infrastructure Investment and Jobs Act was signed into law, retroactively terminating the Employee Retention Credit (ERC). This amendment revokes employers from claiming the credit for wages paid after September 30, 2021, unless the employer is a recovery start up business.

On December 6, 2021, the IRS issued Notice 2021-65, providing guidance on the repeal and how employers can avoid penalties or interest.

Update: This is a follow-up to our previous article Infrastructure Bill – November 2021 in which we promised to keep you posted if the IRS issued more guidance regarding the ERC termination.

Guidance Applies to Select Employers
The released guidance is targeted towards employers who claimed the ERC and applies to those that:

• Paid any wages following September 30, 2021
• Received advance payment of the ERC for the wages paid or reduced employment withholdings in anticipation of the ERCs for the last quarter of 2021
• Are no longer eligible for the ERC because of the law change

Employers that Received Advanced Payments
Employers that already received advance payments of the ERC for wages paid in the fourth quarter for 2021 can avoid any penalties or interest so long as they repay those amounts by the due date of their applicable employment tax return. The advance payment will likely be reported on Form 943 and the IRS will soon be updating the instructions on how to process the payment. If an employer never received an advanced payment, nothing needs to be done.

Employers that Reduced Withholdings
Employers that reduced their required withholding (employment tax deposits) in anticipation of the ERC for the fourth quarter of 2021 will also be able to avoid any penalties or interest through repayment. Employment tax deposits that are due on or before December 20, 2021 for wages paid in the fourth quarter must be repaid on or before the employment tax deposit due date for wages paid on December 31, 2021. The reduced withholding must have also been consistent with the rules of previous IRS guidance and the resulting tax liability from early termination of the ERC must be reported on the employer’s employment tax return that includes the fourth quarter of 2021. If an employer reduces their deposits after December 20, 2021 for wages paid after September 30, 2021, the IRS will not waive penalties for failure to deposit unless the employer is a recovery start up business.

For employers that are ineligible for relief under the IRS notice, they are being advised to respond to any penalty notices with a corresponding explanation and the IRS will consider reasonable cause relief.

If you have questions regarding this article please contact your Herbein + Company, Inc. tax consultant or email us at info@herbein.com.

Article prepared by Paige Famous.