IRS Issues Guidance for Retroactive Termination of the Employee Retention Credit

On December 6, the IRS issued Notice 2021-65 to offer employers guidance on the retroactive end date of the Employee Retention Credit (ERC). Previously, the ERC was expected to be discontinued on Dec. 31, 2021, but with the enactment of the Infrastructure Investment and Jobs Act in November of this year, it was retroactively discontinued as of Oct. 30, 2021*.

Since it was a retroactive change, the IRS issued Notice 2021-65 to clarify the steps eligible employers should take if they paid wages after Sept. 30, 2021, received an advance payment of the ERC for those wages or reduced employment tax deposits in anticipation of the credit the 4^th quarter of 2021 and are now ineligible for the credit due to the change in the law.

Here’s what the IRS recommends employers do to avoid penalties:

• Employers that received advance payments. Generally, employers that are not RSBs 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 employment tax returns.
• Employers that reduced employment tax deposits. Employers, excluding RSBs, that reduced deposits on or before Dec. 20, 2021, for wages paid during the fourth calendar quarter of 2021 in anticipation of receiving the ERC will not be subject to a failure-to-deposit penalty with respect to the retained deposits if:
  • The employer reduced deposits in anticipation of the ERC consistent with the rules in Notice 2021-24.
  • The employer deposits the amounts initially retained in anticipation of the ERC on or before the relevant due date for wages paid on Dec. 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.
  • The employer reports the tax liability resulting from the termination of the employer's ERC on the applicable employment tax return or schedule that includes the period from Oct. 1, 2021, through Dec. 31, 2021.

Due to the termination of the Employee Retention Credit for wages paid in the fourth quarter of 2021 for employers that are not recovery startup businesses, failure to deposit penalties are not waived for these employers if they reduce deposits after Dec. 20, 2021.

The guidance also states that if an employer does not qualify for relief under this Notice, it may reply to a notice about a penalty with an explanation and the IRS will consider reasonable cause relief.

If you have questions about Notice 2021-65 or the retroactive termination of the ERC, our team of experienced accounting professionals are standing by to help.

*This does not include wages paid by a recovery startup business.