With President Biden’s Signing of the Infrastructure Investment and Jobs Act (IIJA) on Nov. 15, employers’ ability to claim employee retention credits (ERC) for eligible wages paid after Sept. 30, 2021, has been retroactively eliminated.
In the simplest terms, this means that employers will no longer be able to claim the tax credits they had grown accustomed to for much of the pandemic.
Surprise! It’s over, and it was over about a month and a half prior to the legislation that ended it.
This is certainly not what many would assume an infrastructure bill would consist of, particularly since the ERC was planned to continue throughout the entirety of 2021, as I noted in my article back in March of this year.
This article is intended to help you shift gears and recalculate what you might have planned to submit on your 941-x form, something I had also discussed in an article earlier this year.
Let’s look into what needs adjusting, what can be left as is, and how to do it.
I’ve Forgotten, How Exactly Did the ERC Work?
The ERC allowed employers to retain up to 70% of $10,000 in qualified wages (wages or benefits paid to employees), resulting in a $7,000 credit on payroll taxes due, per employee, per quarter. Essentially, money that would normally be paid to the government in payroll taxes on a monthly or bi-weekly basis could be pocketed and then claimed through form 941-X.
President Trump first enacted the ERC as a provision of the CARES act. It was updated by the CAA in December 2020 and again updated by President Biden’s ARP act. Its purpose was to encourage employers to keep employees on the payroll instead of laying them off during times of financial difficulty. Trump extended the amount employers could claim, and Biden extended the amount of time they could claim it. It seems that Biden has done an about-face regarding ERC extending through Q4.
Are There Penalties For Failure to Abide By This ERC Change?
Sadly, crazily, unfairly, yes, penalties are to be assessed. Even though this change to the ERC was done suddenly and retroactively, employers are expected to make payroll tax payments for Q4 as though the ERC never existed.
As the National Law Review said quite clearly and concisely, “The infrastructure bill does not provide for penalty relief for the businesses that have been retaining payroll taxes. The penalty goes up to 10% of the amount of payroll taxes that should have been deposited if the deposit is over 15 days late. Furthermore, no provision allows 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.”
Are Any Businesses Exempt from this Change to the ERC?
Yes! Recovery startup businesses are exempt. These businesses are defined in Section 3134 of the Internal Revenue Code as a business that began operations after February 15, 2020, for which the average annual gross receipts do not exceed $1 million for the three-taxable-year period ending with the year that precedes the calendar quarter for which the credit is determined.
In layman’s terms: if you started your business after 2/15/2020, and the average annual gross receipts of all the years you’ve been operating doesn’t exceed $1 million, you’re still able to claim the ERC as permitted by Biden’s American Rescue Plan. That said, the maximum ERC these recovery startup businesses can claim in any quarter is capped at $50,000.
But Wait, There’s More! It’s Not Good News, Either
Another provision of the CARES act was to allow employers to defer the Social Security taxes on wages paid between April 1st and December 31st of 2020. This June, the IRS released a memorandum stating that businesses would be required to pay 50% of the deferred taxes on December 31st of 2021 and the second 50% on December 31st of 2022.
That isn’t breaking news, but the sudden announcement for business owners that ERC credits expected for Q4 of 2021 aren’t available could potentially throw off employers’ plans as to how they would pay Social Security taxes deferred over the majority of the prior year.
Of course, the IRS understands that predicament that many business owners have suddenly found themselves in, right? Nope. One day late on this payment will result in a 10% penalty on the entirety of the 2020 social security taxes owed. Push it another ten days, and you’ll find yourself paying a 15% percent penalty.
Although it wasn’t specified, it’s safe to assume that interest will accrue on the taxes due as well.
The Takeaway of Retroactive Tax Credit Retraction
Revealing a bit about myself (if you care), I come from a background in Political Science. Perhaps surprising to those who never studied politics and completely logical to those who have, I rarely see issues worth writing your representatives about because I think letters and emails often fall on deaf ears.
Why am I so pessimistic? Well, because I’ve done enough reading over my years in college and afterwards to determine that often, decisions have already been made, and the public debate is just for show.
This is not one of those situations. Write your Reps and Senators and demand a change to this situation.
I believe what’s been done here is tremendously unfair to business owners. This is a classic bait and switch at a time that employers have been doing everything in their power to keep their businesses afloat, keep people employed, and keep up with the ever-changing landscape of programs, laws, restrictions, and now, retroactively changing legislation.
It’s hard enough to run a business in the best of times; it’s simply unfair to do this to business owners during a period that is arguably the most financially challenging in living memory.
Contact Information for Representatives in Congress
Rep. Chris Smith 4th District (Point Pleasant to Trenton)
Rep. Frank Pallone 6th District (Asbury Park to New Brunswick)