Employee Retention Credit – IRS Releases Guidance on Repayment of Ineligible Credit

The Infrastructure Investment and Jobs Act was passed in November retroactively terminated the Employee Retention Credit for the fourth quarter of 2021. This excludes businesses that qualify for the ERC as a recovery startup business. On December 6, 2021, the IRS released guidance in Notice 2021-65 for employers who were anticipating a credit and modified their employment tax deposits. The guidance provides the necessary steps to avoid penalties, and remit payment of the credit back to the IRS.

For employers that reduced their employment tax deposits in anticipation of claiming the ERC,, the IRS will not impose a failure to deposit penalty on tax deposits retained before December 20, 2021. To avoid failure to deposit penalties the employer must satisfy the following three tests.

  1. The employer reduced its deposits in anticipation of the employee retention credit, consistent with the rules provided in section 3.b. of Notice 2021-24; and

  2. The employer deposits the amounts initially retained in anticipation of the employee retention credit 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 or schedule that includes the period from October 1, 2021 through December 31, 2021.

  3. The employer reports the tax liability resulting from the termination of the employer’s employee retention credit on the applicable employment tax return or schedule that includes the period from October 1, 2021 through December 31, 2021.

Employers that filed Form 7200 to receive an advance payment of their fourth quarter ERC will need to submit payment back to the IRS by the due date of their applicable employment tax return to avoid failure to pay penalties.

In the event an employer does not qualify for relief under these reasons, additionally penalty relief may be available by responding to the IRS notice and providing reasonable cause.

While the ERC is eliminated, there is still opportunity to claim credits related to 2020 and the first three quarters of 2021. To see if you may qualify, refer to our July 27th Webinar to learn more about the credit. Employers should carefully review this guidance and coordinate with their payroll providers to determine their appropriate deadlines. We’re here to help. Please reach out to HBK to discuss your situation.

About the Author(s)
Donald is a Senior Manager in the Youngstown, Ohio office of HBK CPAs & Consultants. He is also a Tax Specialist for HBK Manufacturing Solutions and serves numerous manufacturing clients, performing tax compliance, planning, and consulting. His background in taxation includes more than seven years working with privately held businesses and high-net-worth individuals. His areas of expertise include partnerships, S corporations, C corporations, and individuals. He also assists his clients with year-end planning, merger and acquisition planning, choice of entity planning, and conflict resolution. Donald worked with a national accounting firm before joining HBK in November of 2020. For more information contact Donald at (330) 758-8613; or by email at dtrummer@hbkcpa.com.
Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.