Can the Employee Retention Credit Return?
A bipartisan group of Congressional representatives—including Stephanie Murphy (D-FL), Terri Sewell (D-AL), Carol Miller (R-WV), and Kevin Hern (R-OK)—introduced H.R. 6161, the “Employee Retention Tax Credit (ERTC) Reinstatement Act,” to undo the early termination of the ERC that was enacted by the Infrastructure bill on November 15.
The new bill would simply reinstate the ERC, now retroactively, for the fourth quarter of 2021. To become law, the text of this bill would need to be incorporated into a larger piece of legislation, such as the Build Back Better bill.
About the Employee Retention Credit
The Employee Retention Credit is a fully refundable tax credit for eligible employers that paid qualified wages (including allocable qualified health plan expenses) to employees during the COVID-19 pandemic. The credit, initiated via the CARES Act, applied to qualified wages paid after March 12, 2020, and before January 1, 2021.
For that period, the maximum amount of qualified wages considered with respect to each employee for all calendar quarters is $10,000, and the credit is 50 percent of qualified wages for a maximum credit of $5,000 per employee. The Consolidated Appropriations Act of 2021 and the American Rescue Plan Act (ARPA) extended this credit for wages paid on or after January 1, 2021 and before December 31, 2021.
The new legislation also increased the qualified wages and credit percentage to 70 percent of $10,000 for each calendar quarter, for a possible credit of up to $28,000 per employee. As mentioned above, the Infrastructure Investment and Jobs Act limited this period to wages paid before October 1, 2021, thus reducing the possible credit to $21,000 per employee.
The tax credit offsets all withheld federal employment taxes including federal income tax withholding, Employer FICA and Medicare. Any excess credit will be refunded or advanced by the IRS.
Employers that are eligible to receive the Employee Retention Credit are those that carry on a trade or business during calendar year 2020 and/or 2021, including a tax-exempt organization, that either:
- Fully or partially suspends operation during any calendar quarter in 2020 and/or 2021 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19
- Experiences a significant decline in gross receipts during the calendar quarter
For 2020, a significant decline in gross receipts means a decline of at least 50 percent compared to the comparable quarter in 2019. In 2021 this threshold was reduced to a decline of at least 20 percent.
While the CARES Act originally barred employers that had taken a Payroll Protection Plan (PPP) loan from also taking the ERC, the Consolidated Appropriations Act changed this rule such that employers that have already taken a PPP loan may also be eligible for the ERC.
Enacted on November 15, 2021, the Infrastructure Investment and Jobs Act included an early termination of the Employee Retention Tax Credit, which effectively ends the program (except for recovery startup businesses) on September 30, 2021. Because the early termination is retroactive, some companies may have utilized one of the available options to claim those tax credits in advance, during the fourth calendar quarter. New IRS guidance released on December 6 discusses the requirements to repay those amounts and the penalty relief available.
Some Companies Will be Repaying or Hit with Penalties
So far, taxpayers have had two options for accelerating the benefit from ERC:
1. Using form 7200 to request advance payment of credit
2. Reducing current employment tax deposits. IRS Notice 2021-65 details that taxpayers who used either of these methods during the fourth quarter must now repay those amounts.
Employers who requested and received an advance payment using form 7200 must pay the advance back, “by the due date for the applicable employment tax return that includes the fourth calendar quarter of 2021.” Failure to make this payment may result in penalties.
However, employers who reduced payroll tax deposits due on or before December 20, 2021 for wages paid on or after October 1, 2021, must now pay back those amounts “on or before the relevant due date for wages paid on December 31, 2021 (regardless of whether the employer actually pays wages on that date).”
The result is that there are two different deadlines depending on the type of advance payment a given taxpayer utilized. It is important to note that none of the changes apply to businesses that qualify under the new recovery startup business rules which are still in effect for the third and fourth quarters of 2021.
Talk to the Experts. Most Businesses Qualify
A majority of businesses that qualify for the ERC have yet to claim it. Often, these businesses believe they are not eligible for such a valuable credit. It’s best to check with the experts to ensure your business or your client’s business is taking advantage of the ERC.
To learn more about the current state of the Employee Retention Credit, as well as unemployment annual tax rates and new guidance on R&D tax credits refunds, join this Free webinar, available for 1 CPE credit, on Wednesday Dec. 15, 2pm EDT and a panel of experts from Experian Employer Services that will help you with tax and compliance planning for 2022.