Retroactive Sunset of the Employee Retention Credit

On November 5th, 2021, the House of Representatives passed the bipartisan Infrastructure Investment and Jobs Act. This Bipartisan Infrastructure Bill (BIF)will now go to the President’s desk for signature into law.

The BIF originally passed the Senate on August 10, 2021. Its passing without any revisions by the House accelerates the end date of the Employee Retention Credit (ERC) for most. Under current law, wages paid on or after January 1, 2022, would no longer qualify for the ERC. After enactment of BIF, wages paid on or after October 1, 2021, except in the case of a recovery startup business, would no longer qualify for the ERC. Recovery startup businesses continue to be eligible for the ERC for wages paid on or before January 1, 2022. The change is retroactive to calendar quarters beginning after September 30, 2021.

Most employers that incur payroll tax liabilities report the liability quarterly on Form 941 – Employer’s Quarterly Federal Tax Return – but are generally required to make deposits for employment taxes on a monthly or bi-weekly basis. Eligible employers that qualify for the ERC claim the credit by first reducing the employer’s portion of Social Security tax on the appliable Form 941. Any remaining ERC is then refunded.

An eligible employer has the option to reduce one or more federal employment tax deposits in anticipation of qualifying for the ERC. A failure to deposit penalty is imposed under IRC section 6656 if the amount is not accurate or the deposit is not timely unless reasonable cause for the failure can be demonstrated, and the failure was not a result of willful neglect. Therefore, employers that were anticipating claiming the ERC for wages paid in fourth quarter of 2021 and have been reducing their payroll tax deposits should consider making catch-up deposits because of the retroactive change to end the ERC early for most eligible employers.

This retroactive change will not impact ERC claims for prior quarters.

For questions, reach out to us at erc@dhg.com.

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