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Since its original enactment under the CARES Act, the Employee Retention Credit (ERC) has undergone several changes, extensions, and updates. Most recently, the credit was retroactively ended, even though it was expected to continue through the end of 2021.

The ERC provided employers with fully refundable payroll tax credits that can be claimed for 70% of qualified wages for eligible businesses with 500 or fewer employees that experienced a reduction of more than 20% in gross receipts for the same quarters in 2020 and 2019.  The November 15 federal infrastructure law made the ERC applicable for wages paid through Sept. 31, 2021, except for recovery startup businesses.

On December 6, the IRS issued guidance on the retroactive termination of the Employee Retention Credit (ERC) and how affected businesses should handle the new policy.

Who is affected by the new IRS guidance?

The guidance applies to employers who reduced payroll tax deposits or already received an advance payment in expectation of receiving the credit in the fourth quarter of 2021 but are now ineligible.

How should those businesses react?
  • Employers who received advance payments must repay the amounts received by the due date of their employment tax returns to avoid penalties.
  • Employers who reduced payroll taxes must deposit the amounts initially reduced and must also report the tax liability on the fourth quarter tax return.
Employers (except recovery startup businesses) who continue to reduce deposits after Dec. 20, 2021, will be subject to penalties.

If you received the ERC and have questions about the retroactive termination or new guidance, don’t wait until it’s too late. Please contact the tax professionals at BSB. We are following the latest developments and can help you maximize your tax benefits while remaining compliant with current law.