Article Highlights:
- Infrastructure Investment and Jobs Act (IIJA) Signed into Law
- Employee Retention Credit Terminated Early
- Problem for Some Employers
- No Relief Included for Employers Already Claiming the Credit in the 4th Quarter
- Recovery Startup Businesses Still Qualify
President Biden signed the Infrastructure Investment and Jobs Act (IIJA) on November 15, 2021. One of the provisions of that legislation retroactively terminated the employee retention credit (ERC) early. The credit was previously available to eligible employers for wages paid through the end of 2021. Under this change, the credit terminates after the third quarter.
The Senate passed the IIJA well before the 4th quarter of 2021 began, but issues in the House delayed the vote in favor of the Act until late in the evening of November 5, 2021, over a month after the 4th quarter began. The delay created a problem for employers who, based on prior law, were claiming the credit for the 4th quarter and were reducing their payroll deposits based upon the ERC.
Under the IIJA, employers are not qualified for the credit for wages paid after September 30, and thus employers should have been making their regular payroll deposits during the fourth quarter. IIJA includes no provision to deal with employers planning to use the ERC to offset payroll taxes. For now, it’s not clear if employers who reduced their payroll tax deposits before the passage of the Act will face late deposit penalties for the payroll taxes they failed to deposit.
If neither Congress nor the IRS provides relief, employers will not only have to deposit payroll taxes for the 4th quarter they thought were covered by the Employee Retention Credit (ERC), they may also be subject to penalties up to 10%.
The many problems created by this issue may be magnified as some firms had taken advantage of a CARES Act provision allowing the deferral of certain 2020 payroll taxes. Those deferred amounts are payable in two payments, one by December 31, 2021, and the other by December 31, 2022. This deferral, combined with having to make up for the unpaid 4th quarter 2021 employment taxes, may prove to be a heavy burden for smaller employers. Thus, even though the ERC and payroll tax deferral was supposedly intended to help small firms struggling because of the COVID pandemic, it may have the opposite effect. The increase of the burden on these financially fragile businesses may contribute to their demise.
There is an exception to the early termination of the credit. It applies to Recovery Startup Businesses that will be allowed to claim the credit through the end of 2021. A recovery startup business is an employer that began carrying on any trade or business after February 15, 2020, and has gross receipts under $1,000,000 for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the employee retention tax credit is determined.
If you are already a Payroll Complete client, you have no worries! The tax laws and structure are constantly evolving. Our team of hard-working, highly-skilled professionals is always aware of the latest changes, so you can rest assured that you will not face any unexpected penalties. If you don’t have the Payroll Complete team working hard for you, check out this link to see how we can best serve your payroll needs.
Let’s hope the government does the right thing and waives the penalties for the 4th quarter of 2021. If you have any questions, please don’t hesitate to call this office or reach out to us for further details and assistance with dealing with this issue.
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