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.

The Employee Retention Credit is Imperiled in the Senate

Alarmingly, the Senate is voting this week to defund support for jobs at small businesses that are still suffering from the pandemic.

Just as we're asked to mask up and consider potential restrictions and lockdowns again, the Senate buried a provision to terminate Employee Retention Credits at the end of next month, instead of the end of the year. These credits help pay for payroll costs for small businesses that are still suffering from significant sales declines due to COVID.

Raise your voice to your Senator or local trade group - removing support for employees and small businesses at a time of such looming uncertainty is a huge mistake.

Big Changes to the Child and Dependent Care Credit

Along with the expansion of the Child Tax Credit we flagged last week, the American Rescue Plan is also massively expanding the Child and Dependent Care Credit for 2021. The IRS has released a fairly comprehensive FAQ, but the long and short of it is that if you pay for childcare in 2021, you’re going to be entitled to claim a hefty refund: a median income household with two kids under 13 will receive up to $8,000 back in the cost of paying any childcare provider while working or looking for work. Compare this with the previous structure, where they’d have qualified for a maximum of $1,200, and the benefit is obvious.

The finer details: Any household making less than $125,000 per year will receive up to $4,000 for one child under 13, and $8,000 for two or more when they file for 2021.  The amount you receive back will be 50% of the amount you spend on qualified expenses - so if you spend $10,000 on daycare, you’ll get $5,000 back on your 2021 tax return. This benefit applies only to taxpayers who are working or looking for work (both parents must be working if a couple is married), and is intended specifically to defray the costs of child care, whereas the Child Tax Credit (which we told you about in last week’s email) is simply free money for those who have children. 

Taxpayers must have earned income to qualify, and must provide documentation (including a TIN or EIN) from their childcare providers, so your qualified expenses must be with licensed providers.  These expenses are a bit more expansive than just daycare, however - think after school care programs, summer day camps, etc.  

Another important change, and one of the drivers for notifying our business clients about this credit: the Child and Dependent Care Credit is fully refundable for the first time, meaning the full value of the credit is available to low-income working families, regardless of how much they’re paying in 2021 taxes. Once again, this makes it important to spread the word.

As of now the expanded parameters only apply to the 2021 tax year, but making many of these changes permanent is a priority of the current administration, so expect to hear a lot more about these programs as the year rolls on. For more info you can read the IRS’s full guidance, and stay tuned to our blog for more news as it happens.

The Child Tax Credit Can Save You And Your Employees Thousands

Distribution of the Child Tax Credit begins next month for all eligible Americans. We wanted to take a moment to flag this vital monthly payment for you and your business for a handful of reasons.

First, and most obvious, it’s free money to help anyone raising a child. You’ll be hearing a lot about the credit next week, as the White House has announced Child Tax Credit Awareness Day on June 21st. Where typically this money was offered as a tax deduction at the end of the financial year, it’s now being distributed in the form of monthly payments, and substantially expanded - for the current tax year, families will receive $3600 in total for each child under the age of 6, or $3000 for each child between 6 and 17.

Beginning next month, families will be sent a monthly portion of the credit in installments of up to $300, through the end of the year. A handful of specific wrinkles and stipulations apply, so if you’re confused about whether you qualify, don’t hesitate to reach out. That said, this is the most expansive increase of the Child Tax Credit to date. If you filed taxes last year, you don’t have to worry about signing up or qualifying, as everything is automatic.

Which brings us to the second important point - if you didn’t file taxes last year, the IRS has established a helpful online tool to register to receive payments. Those who qualify to use the tool: 1. Did not and do not plan to file a 2020 tax return, and 2. Have a main home in the US for more than half of the year.

Many of our clients’ businesses will have employees who this applies to - part time, low income, non-filers for whatever reason will be able to take advantage of the credit, so it’s important to spread the word.

For more info you can read The New York Times’ thorough breakdown of the new rules and the White House’s own fact sheet. As ever, follow our blog for up to date information and don’t hesitate to reach out to your Harmony partner if you have questions.