Introduction
You have probably heard that the Infrastructure Investment and Jobs Act signed into law on November 15, 2021, eliminated the Employee Retention Credit for 2021 Q4. Especially if you were anticipating the receipt of the Employee Retention Credit, you’re wondering if there’s anything that will help.
One thing is to keep in mind that eligible employers can claim the ERC for all calendar quarters before Q4 2021. The other is to know that the AICPA, American Institute of Certified Public Accountants, has asked Congress to direct the IRS to waive payroll tax penalties imposed due to the ERC withdrawal.
Background
The ERC or Employee Retention Credit idea was to help employers avoid layoffs during the COVID-19 pandemic. The ERC was put into place in March 2020 as part of the CARES Coronavirus Aid, Relief, and Economic Security Act.
You’re probably very aware that the ERC was a fully refundable payroll tax credit for employers who had experienced either partially or fully halted operations or a significant decline in gross receipts because of the COVID-19 pandemic. It would also apply to restrictions imposed by the government during that time.
How the ERC benefited the employer: Eligible employers could claim the credit against its portion of Medicare taxes (at a 1.45% rate) equaling 70% of the qualified earnings paid to each employee (to a maximum of $10,000 in qualified wages per employee per calendar quarter) in Q3 and Q4, 2021.
The ERC was later amended by the Consolidated Appropriations Act in 2021 and the American Rescue Plan Act, extending the ERC’s benefits to apply to wages paid before January 1, 2022. On November 15, President Biden signed into law the Infrastructure Investment and Jobs Act, eliminating the ERC for Q4 2021 save for Recovery Start Up Businesses (“RSBs”). An RSB is a company that began operating after Feb. 15, 2020, and had average annual gross receipts of less than $1 million. For RSBs, the ERC is limited to a maximum total credit of $50,000 per quarter for a topmost credit of $100,000 for 2021.
Is there any good news?
For the first three quarters of 2021, eligible employers can claim a maximum payroll tax credit of $7,000 per employee per quarter. Then, for all of 2020, the maximum credit is $5,000 per employee. So, if an employer is eligible for both 2020 and 2021, the maximum credit it can claim is $26,000 per employee. (($7000 x 3 = $21,000) + $5,000 = $26,000). Eligible employers can claim the ERC on any wages not used toward payroll costs when they applied for PPP forgiveness. To claim the ERC for previously filed quarters, file Form 941-X. Although the Q4 2021 ERC has been repealed, the ERC could still provide an opportunity for eligible businesses and organizations to offset revenue declines during the COVID-19 pandemic. Leave no stone unturned.
Conclusions and Recommendations
Make sure to claim payroll tax credits for Q1, 2, and 3, for 2021, and for all of 2020. If you planned to receive the ERC based on payroll taxes between September 30, and December 31, 2021, and you retained payroll taxes, we hope you will contact your CPA for up-to-the-minute information before you take any action. As of this moment, the definition of a Recovery Startup Business is still in flux. And the AICPA is still awaiting the IRS guidance to assist employers in handling compliance issues.
