The Infrastructure Investment and Jobs Act (IIJA) expected to be signed Monday, November 15th, 2021 by President Biden will retroactively end the Employer Retention Tax Credit (ERTC) effective September 30, 2021 (rather than through December 31, 2021), unless the employer is a recovery startup business. As a result of this retroactive termination of the ERTC, employers should review their payroll tax compliance (including tax deposits) to make sure that it conforms with these changes.
Congress originally enacted the ERTC in the Coronavirus Aid, Relief and Economic Security (CARES) Act in March of 2020 to encourage employers to retain employees during the pandemic. Congress later extended and modified the ERTC to apply to wages paid before January 1, 2022. Eligible employers could claim the refundable ERTC against the employer’s share of Medicare (1.45% rate) taxes equal to 70% of the qualified wages paid to each employee (up to a limit of $10,000 of qualified wages per employee per calendar quarter) in the third and fourth calendar quarters of 2021.
For the third and fourth quarters of 2021, a recovery startup business is an employer eligible to claim the ERTC. Under pre-IIJA law, 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) didn’t 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. However, recovery startup businesses are subject to a maximum total credit of $50,000 per quarter for a maximum credit of $100,000 for 2021.
In connection with the continued availability of the ERTC for recovery startup businesses in the fourth quarter of 2021, the IIJA also modified the definition of a recovery startup business so that the prerequisite that a recovery startup business must not have otherwise met the requirements for an eligible employer qualifying for the ERTC, i.e., having experienced a significant decline in gross receipts or having been subject to a full or partial suspension under a government order, no longer applies. Thus, because of the modified definition, an employer that was not a recovery startup business in the third quarter of 2021 might qualify as a recovery startup business in the fourth quarter of 2021 and be able to claim the ERTC for the fourth quarter of 2021.
If an employer retained payroll taxes in anticipation of receiving the ERTC based on post-September 30, 2021 payroll taxes, they need to review their current tax status and determine how and when to repay the specified taxes and address any other compliance matters. The IRS is expected to issue guidance in order to assist employers with their compliance concerns.
If you have additional questions or concerns about how the retroactive termination of the ERTC will affect your business, please contact your CPA or other tax advisors.