IRS Issues Guidance on Retroactive Expiration of Employee Retention Tax Credit

On December 6, 2021, the Internal Revenue Service (IRS) issued Notice 2021-65 to provide guidance to employers affected by the early termination of the Employee Retention Tax Credit (ERTC). These are employers who paid wages after September 30, 2021, and either reduced their Employment Tax deposits, or received advanced payments of the ERTC while anticipating the credit for the fourth quarter of 2021. Employers claiming the credit as a Recovery Startup Business are still eligible to take the credit until December 31, 2021.

The Infrastructure Investment and Jobs Act was signed into law by President Joe Biden in November 2021. These released funds are to be used to improve national infrastructure, but also ended the ERTC early. The ERTC was set to expire on January 1, 2022, but this Act ended the credit retroactive to September 30, 2021.

At this time, employers (other than Recovery Startup Businesses) should stop applying any ERTC amounts to pay dates after September 2021, and any ERTC credits applied after September must be reversed and paid to the IRS.

Employers that reduced their Employment Tax deposits on or before December 20, 2021, for wages paid during the fourth quarter of 2021 anticipating the ERTC and that aren’t Recovery Startup Businesses will not be subject to a failure to deposit penalty with respect to the retained deposits if:

  • The employer reduced their deposits in anticipation of the ERTC, consistent with the rules in Notice 2021-24
  • The employer deposits the amounts initially retained in anticipation of the ERTC on or before the relevant due date for wages paid on December 31, 2021 (regardless of whether the employer actually pays wages on that date). Deposit due dates will vary based on the deposit schedule of the employer, and
  • The employer reports the tax liability resulting from the termination of the employer’s ERTC on the applicable Employment Tax return or schedule that includes the period from October 1, 2021, through December 31, 2021. Employers should refer to the instructions to the applicable Employment Tax return or schedule for additional information on how to report the tax liability.

In relation to Notice 2021-65, proposed penalties that are related to deposits due before December 21 would be waived upon request. IRS penalty notices may also be issued, in which employers would need to diligently respond to and explain the circumstances and ask for a penalty waiver.

Employers who received advanced payments of the ERTC can avoid penalties if they repay those amounts before December 31, 2021, or relevant due date.