On November 15, 2021, President Biden signed into law the Infrastructure Investment and Jobs Act (IIJA). As part of this legislation, certain changes were made to the Employee Retention Credit (ERC).
The ERC was originally enacted in the Coronavirus Aid, Relief and Economic Security (CARES) Act in March of 2020 to encourage employers to retain employees during the pandemic. Congress later extended and modified the ERC to apply to wages paid before January 1, 2022. The credit allows eligible employers to claim a refundable credit against their share of Medicare taxes that is equal to 70% of the qualified wages paid to each employee, up to a limit of $10,000 of qualified wages paid per employee per quarter.
Due to changes made as part of the IIJA, the ERC has been retroactively terminated to apply only to wages paid before October 1, 2021, unless the employer is a recovery startup business. As a result of this change, employers are no longer able to claim the ERC for wages paid in the fourth calendar quarter of 2021. A recovery startup business is any business that:
- began carrying on any trade or business after February 15, 2021, and
- has average annual gross receipts that do not exceed $1,000,000 for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the ERC is determined.
It should be noted that the IIJA adjusted the language of a startup business to remove the prerequisite that the business must not have otherwise met the requirements for an eligible employer qualifying for the ERC (i.e., significant decline in gross receipts or subject to shut down order). As a result, an employer who was not a startup business at the end of the third calendar quarter of 2021 might qualify as a startup business for the fourth calendar quarter of 2021 and therefore be eligible for the ERC for the fourth quarter of 2021 as a startup business.
For employers who retained payroll taxes in anticipation of receiving the ERC based on post-September 30, 2021 payroll taxes, they should cease this practice and begin making their payroll deposits as they did pre-ERC. There has been no guidance given whether penalties will apply to amounts retained associated with anticipated credit amounts prior to the retroactive termination. The American Institute of Certified Public Accountants has recommended to Congress that the IRS waive any associated penalties and provide a reasonable, practical method for payment of unpaid employment taxes. We will continue to monitor the situation and provide updated guidance as it becomes available.
If you have any questions about the changes to the ERC brought about by the passing of the IIJA, please do not hesitate to contact your H2R CPA liaison for more information.