Employee Retention Tax Credit Ends Early

November 18, 2021

When President Joe Biden signed the Infrastructure Investment and Jobs Act (IIJA) into law on Nov. 15, it ended the Employee Retention Tax Credit (ERTC) three months earlier than scheduled.

First enacted under the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020 to encourage employers to retain employees during the pandemic, the ERTC was a refundable payroll tax credit originally available from March 2020 through December 31, 2021. The IIJA shortens the ERTC timeframe to end three months earlier, on September 30, 2021, and does not provide for any penalty relief for companies that have been monetizing the credit as wages are paid, as IRS guidance allowed.

The IIJA also modified the definition of a recovery startup business. Prior to IIJA, a recovery startup business was defined as a business that (1) began operating after February 15, 2020, (2) had average annual gross receipts of less than $1 million and (3) did not meet the eligibility requirement applicable to other employers of having experienced a significant decline in gross receipts or having been subject to a full or partial suspension under a government order.

To allow continued availability of the ERTC to recovery startup businesses, the IIAJ amends the definition of these businesses to only include (1) began operating after February 15, 2020, and (2) had average annual gross receipts of less than $1 million; thereby excluding the third prerequisite. Due to this modified definition, an employer that was not a recovery startup business in 2021 Q3 might qualify as one in 2021 Q4 and be able to claim ERTC benefits for the fourth quarter of 2021.

The ERTC was a 70 percent refundable tax credit for wages paid (up to a maximum of $7,000 per employee per quarter) available to an eligible business (one that employed 500 or fewer full-time employees in 2019) if the business had a greater than 20 percent reduction in gross receipts for the quarter, compared to the same quarter in 2019. Due to the infrastructure bill’s early termination of the credit, however, there will be no credit for wages paid retroactively beginning on Oct. 1.

Employers who retained Q4 payroll taxes in October and November 2021 in anticipation of receiving the ERTC for this quarter, those amounts will need to be repaid. The IIAJ bill does not provide for penalty relief for the businesses that have been retaining payroll taxes. The penalty goes up to 10 percent of the amount of payroll taxes that should have been deposited if the deposit is over 15 days late. Furthermore, there is no provision allowing a business to pay back the amount it had expected to claim over time. As a result, interest will accrue on the amount of payroll taxes not deposited, plus the penalty.

In addition to having to repay the payroll taxes, penalties, and interest due on payroll taxes retained in anticipation of the credit for fourth quarter wages already paid, some companies already have deferred the employer’s share of Social Security taxes for wages paid between April 1 and Dec. 31, 2020, as allowed under the CARES Act. Companies must repay the first half of these deferred taxes by Dec. 31, 2021.

Consequently, some small businesses will now have to: 1) repay advances of the retention credit they have been monetizing by retaining payroll taxes withheld since Oct. 1; and 2) repay their share of Social Security taxes deferred during the second through fourth quarters of 2020.

The ERTC has been an invaluable lifeline for many small businesses still struggling from the pandemic to retain employees. This financial strain will further distress some companies. Some have called on Congress to reconsider and find a way to reinstate it until the end of the year.