A new law has retroactively ended the Employee Retention Credit to apply only through September 30, 2021 (rather than through December 31, 2021) — unless the employer is a recovery startup business.
The Infrastructure Investment and Jobs Act, signed into law Nov. 15, only has a handful of tax provisions but this one is significant for some businesses.
As a result of the retroactive termination of the ERC, some employers may need to review their payroll tax compliance (including tax deposits) to make sure that it conforms with the changes.
Background on the Credit
Congress originally enacted the ERC in the CARES Act back in March of 2020 to encourage employers to retain employees during the COVID-19 pandemic. In subsequent laws, the credit was extended and modified to apply to wages paid before January 1, 2022.
Eligible employers could claim the refundable ERC against the employer's share of Medicare taxes (1.45% rate) equal to 70% of the qualified wages paid to each employee (up to a limit of $10,000 of qualified wages per employee per calendar quarter) in the third and fourth calendar quarters of 2021.
For the third and fourth quarters of 2021, a recovery startup business is an employer eligible to claim the ERC. Under previous law, a recovery startup business was defined as a business that:
- Began operating after February 15, 2020,
- Had average annual gross receipts of less than $1 million, and
- Didn't meet the eligibility requirement, applicable to other employers, of having experienced a significant decline in gross receipts or having been subject to a full or partial suspension under a government order.
However, recovery startup businesses are subject to a maximum total credit of $50,000 per quarter for a maximum credit of $100,000 for 2021.
The ERC was retroactively terminated by the Infrastructure Investment and Jobs Act to apply only to wages paid before October 1, 2021, unless the employer is a recovery startup business. Thus, for wages paid in the fourth calendar quarter of 2021:
- The credit applies only to recovery startup businesses and
- Other employers can't claim the credit.
In connection with the continued availability of the ERC for recovery startup businesses in the fourth quarter of 2021, the new law also modified the definition of a recovery startup business so that a recovery startup business is one that began operating after February 15, 2020, and has average annual gross receipts of less than $1 million.
The previous prerequisite that a recovery startup business must not have otherwise met the requirements for an eligible employer qualifying for the ERC (having experienced a significant decline in gross receipts or having been subject to a full or partial suspension under a government order), no longer applies. Thus, because of the modified definition, an employer that wasn't a recovery startup business in the third quarter of 2021 might qualify as a recovery startup business in the fourth quarter of 2021 and be able to claim the ERC for the fourth quarter of 2021.
If you retained payroll taxes in anticipation of receiving the ERC based on post-September 30, 2021 payroll taxes, contact us to review your situation and determine how and when to repay those taxes and address any other compliance issues. The IRS is expected to issue guidance to assist employers in handling any compliance issues.