IRS Releases Guidance on Q4 Removal of Employee Retention Credit

The Infrastructure Investment and Jobs Act passed in November ended the employee retention credit (ERTC) early, changing the eligible wages to only those paid before Oct. 1, 2021 rather than Jan. 1, 2022 as previously expanded in the American Rescue Plan Act. This change does not apply to recovery startup businesses.

Many businesses were filing for this credit on quarterly Form 941, or retroactively on Form 941-X, and thus, are not be able to file for the fourth quarter. Some businesses, though, may have been holding payroll tax deposits in anticipation of fourth quarter credits as prior guidance allowed. The IRS has now released Notice 2021-65 (the Notice) to provide guidance for those employers to make adjustments for the taxes now owed for the fourth quarter that were not previously anticipated.

Specifically, the Notice provides:

• Employers who already received an advance payment of the fourth quarter credit, and who are no longer eligible for the fourth quarter, must repay the amount by the due date for the fourth quarter employment tax return or be subject to failure to pay penalties.
• Employers who were following prior guidance to reduce fourth quarter deposits in anticipation of a credit, and who are no longer eligible for a credit in the fourth quarter, will not be subject to failure to deposit penalties for deposits due on or before Dec. 20, 2021 if the employer deposits such amounts by the due date for wages paid on Dec. 31, 2021, according to the employer’s deposit schedule and reports the liability on the fourth quarter employment tax return per the instructions. It is important to note if this liability would result in more than $100,000 due on Dec. 31, 2021, then the next day rule will apply.

Employers who do not qualify for penalty relief under the Notice may provide a reasonable cause explanation upon receipt of an IRS notice of a failure to deposit penalty.

This Notice has been anticipated since legislation to remove the credit drifted into the fourth quarter itself. Some companies had speculated a longer grace period through the first quarter of 2022 may apply, but this is not the case. Employers should carefully review the guidance and coordinate with payroll providers, where applicable, to address the deadlines for penalty relief.