President Biden signed the Infrastructure Investment and Jobs Act (IIJA) into law on
November 15, 2021. One of the provisions of that legislation retroactively terminated the
employee retention credit (ERC) early. The credit was previously available to eligible
employers for wages paid through the end of 2021. Under this change the credit terminates
after the third quarter.
Although the Senate passed the IIJA well before the 4th quarter of 2021 began, issues in
the House caused that chamber’s vote in favor of the Act to be delayed until late in the
evening of November 5, 2021, over a month after the 4th quarter began, which has created
a problem for employers who, based on prior law, were claiming the ERC for the 4th quarter
and were reducing their payroll deposits based upon the ERC.
Under the IIJA, employers are not qualified for the credit for wages paid after September
30, and thus employers should have been making their normal payroll deposits during
fourth quarter. IIJA includes no provision to deal with employers who were planning to use
the ERC to offset payroll taxes. For now, it’s not clear if employers who would have qualified
due to the drop in gross receipts tests or full/partial suspension of operations test and
reduced their payroll tax deposits prior to passage of the Act will face late deposit penalties
for the payroll taxes they failed to deposit.
If neither Congress nor the IRS provides relief, employers will not only have to deposit
payroll taxes for the 4th quarter they thought were covered by the ERC, they may also be
subject to penalties up to 10%.
The problems created by this issue may be magnified as some firms had taken advantage of
a CARES Act provision allowing the deferral of certain 2020 payroll taxes with the deferred
amounts payable in two payments, one by December 31, 2021, and the other by December
31, 2022. This, combined with having to make up for the unpaid 4th quarter 2021
employment taxes, may prove be a heavy burden for smaller employers. Although the ERC
and payroll tax deferral was supposedly intended to help small firms struggling because of
the COVID pandemic, it may have the opposite effect, by increasing the burden on these
financially fragile businesses and perhaps contribute to their demise.
There is an exception to the early termination of the ERC that applies to Recovery Startup
Businesses that will be allowed to claim the credit through the end of 2021. A recovery
startup business is an employer that began carrying on any trade or business after February
15, 2020 and has gross receipts under $1,000,000 for the three-tax-year period ending with
the tax year that precedes the calendar quarter for which the employee retention tax credit