The IRS Releases Guidance on Retroactive ERC Termination

This week the IRS released its guidance regarding the retroactive termination of the Employee Retention Credit (ERC). Officially retroactively terminated with last month’s signing of the Infrastructure Investment and Jobs Act, the ERC now applies only to wages paid before October 1, 2021. The only exception is recovery startup businesses (generally, businesses started after February 12, 2020, with less than $1M in annual sales).

We’ve discussed this disheartening move in previous communication, but the long and short of it is that if you’ve claimed ERC deposits for any payments after September 30, 2021, including any advance payments, you’ll need to prepare to return those funds. Failure to deposit penalties are not waived if deposits are reduced after December 20, 2021.

Here’s the IRS’s breakdown:

Employers who Received Advance Payments

Generally, employers that are not recovery startup businesses and received advance payments for fourth quarter wages of 2021 will avoid failure to pay penalties if they repay those amounts by the due date of their applicable employment tax returns.

Employers who Reduced Employment Tax Deposits

Employers that reduced deposits on or before December 20, 2021, for wages paid during the fourth calendar quarter of 2021 in anticipation of the Employee Retention Credit and that are not recovery startup businesses will not be subject to a failure to deposit penalty with respect to the retained deposits if—

1. The employer reduced deposits in anticipation of the Employee Retention Credit, consistent with the rules in Notice 2021-24 PDF,

2. The employer deposits the amounts initially retained in anticipation of the Employee Retention Credit on or before the relevant due date for wages paid on December 31, 2021 (regardless of whether the employer actually pays wages on that date). Deposit due dates will vary based on the deposit schedule of the employer, and

3. The employer reports the tax liability resulting from the termination of the employer's Employee Retention Credit on the applicable employment tax return or schedule that includes the period from October 1, 2021, through December 31, 2021. Employers should refer to the instructions to the applicable employment tax return or schedule for additional information on how to report the tax liability.