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Our attorneys stay on top of changes in legislation, agency regulations, case law, and industry trends—then craft timely legal alerts to keep clients up to date on legal developments important to their business.

December 7, 2021

Employee Retention Credit Repeal: Employers Need to Act Fast

As part of the recently enacted Infrastructure Investment and Jobs Act, the employee retention credit (ERC) was (with a limited exception for a “recovery startup business”) retroactively repealed for the fourth quarter of 2021. The ERC allowed an employer to claim a refundable tax credit against certain employment taxes in an amount equal to a specified percentage of wages (including health plan expenses).

The retroactive repeal of the ERC caught many employers by surprise, as they had acted in good faith in following the rules that were in effect at the time the ERC was claimed. The possibility that such employers might be subject to penalties for merely following then-current law caused a fair amount of consternation among these employers.

Absent administrative relief, an employer would be subject to the normal failure to pay employment tax penalties and failure to deposit employment tax penalties for the fourth quarter of 2021 if the employer paid their employment taxes on the premise of receiving the ERC for the fourth quarter of 2021.

Thankfully, the IRS in Notice 2021-65 granted this relief. Specifically, the notice addresses how employers that received advanced payments of the ERC may return the payments. The notice also explains how employers that reduced employment tax deposits in anticipation of receiving the ERC may avoid penalties.

Employers that received advanced payments of the ERC for the fourth quarter of 2021 may avoid penalties if they return the payments by the time their employment tax returns are due for the fourth quarter of 2021. 

For employers that reduced employment tax deposits in anticipation of claiming the ERC for the fourth quarter of 2021, the notice states that the IRS will waive any penalties if the employer followed the existing rules for claiming the ERC and deposits amounts equal to the reduction by the deadline for deposits associated with wages paid on December 31, 2021. 

Essentially, employers have the next two weeks to follow the rules set forth in the notice to avoid penalties. However, the notice also provides a procedure for noncompliant employers to make a case for “reasonable cause” relief from potential penalties.

If you have questions about the content of this alert, please contact Nick Scarfone or Gerry Stack, Tax Practice Area co-chairs, at nscarfone@barclaydamon.com or gstack@barclaydamon.com, respectively, or another member of the firm’s Tax Practice Area.
 

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