The Employee Retention Credit (ERC) enacted in 2020 to help businesses weather the economic fallout of the COVID-19 pandemic is no longer available for most businesses during the fourth quarter of 2021. Employers who already received advance payments of the ERC for Q4 2021, or who reduced payroll taxes for the same period, have remedies available to avoid penalties.

Background on the Employee Retention Credit Being Repealed

The ERC was repealed for Q4 by a provision in the recently enacted $1.2 Trillion Infrastructure Investment and Jobs Act. Since Congress acted in March to extend the ERC through Q4, it’s unusual that the credit was repealed only six months later. However, eligibility for the ERC was declining, as was usage by businesses, as employees returned to the workplace and revenues recovered from the pandemic.

“Safe harbors” exist for businesses that already received advance payments of the ERC for Q4, or reduced payments of deposits, both of which could subject employers to penalties. Business owners should bear in mind these important points about the repeal of the ERC:

  • If you applied for advance payment of the Q4 tax credit, you’ll need to pay it back before the due date of your Q4 payroll tax return, which is January 31, 2022, to avoid penalties.
  • If you reduced your required payments for deposits of payroll taxes, you must repay the amount you did not remit by the due date of your deposit for wages paid on December 31, 2021 (regardless of whether you actually pay wages on that date). Due dates vary depending on the payroll schedule of the employer but will likely fall during the first half of January 2022. Note that if the total retained deposits are $100,000 or more the “Next-Day Deposit Rule” will apply.
  • The repeal does not affect Recovery Startup Businesses. These are businesses that started after February 15, 2020, and have less than $1 million in gross receipts. They are still able to utilize the ERC for Q4 2021.
  • If you fail to qualify for penalty relief under either of the safe harbors, you can still submit a written request for relief related to reasonable cause.