On November 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act (IIJA) into law. One of the Act’s provisions terminated the Employee Retention Credit (ERC) retroactively to September 30, 2021, except for eligible “recovery startup businesses.” Previously, the ERC was scheduled to continue through the end of 2021, which would have allowed eligible restaurants and other small businesses to claim a refundable employment tax credit of up to $7,000 per employee for qualified wages paid during the fourth quarter.
Before the IIJA was enacted, many businesses, anticipating fourth quarter ERCs, had already either: 1) Received advance payments of the credit for fourth quarter wages; or 2) Reduced their employment tax deposits in anticipation of fourth quarter credits. Fortunately, the IRS has provided guidance on how to handle these situations.
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On December 6, 2021, the IRS issued Notice 2021-65. The notice provides that employers that received advance payments of the ERC for fourth quarter wages must repay those amounts the due date for the applicable employment tax return that includes the fourth calendar quarter of 2021. For example, employers that file quarterly returns on Form 941 have until January 31, 2022. Late payments may result in failure-to-pay penalties.
Employers that reduced deposits in anticipation of the ERC for wages paid in the fourth quarter will not be subject to failure-to-deposit penalties, provided they: 1) Did so on or before December 20, 2021 (deposits reduced after that date are ineligible for penalty relief); 2) Deposit the shortfall on or before the relevant due date for wages paid on December 31, 2021 (regardless of whether they actually pays wages on that date); and 3) Report the tax liability resulting from early termination of the ERC on the applicable employment tax return. Note that the due date varies depending on your deposit schedule. For example, if you are a monthly depositor, your due date will be January 18, 2022.
Keep in mind that even if your business does not meet the requirements for penalty relief outlined in Notice 2021-65, you can still request penalty relief from the IRS based on reasonable cause. Also, the notice does not apply to recovery startup businesses which, as noted above, were permitted to claim the ERC for fourth quarter 2021 wages. Recovery startup businesses are businesses that began operations on or after February 15, 2020 and that meet certain other requirements.
Be sure to keep abreast of developments in Washington, D.C., in the coming weeks. Recently, a bipartisan group of lawmakers introduced legislation in the House of Representatives that would reinstate the ERC retroactively to the beginning of the fourth quarter of 2021, essentially undoing the IIJA’s termination of the Credit. However, the bill’s chances of becoming law are uncertain.
Please keep in mind that if you have not claimed the ERC for the quarters previous to the fourth quarter of 2021, there is still time to amend the previous payroll tax filings to claim the Credit.
For more information about the Employee Retention Credit, please contact Rob Swenson at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Restaurant Group.