The Employee Retention Credit (ERC) ended, but many small to medium-sized businesses still struggle to understand what this means.
The ERC was a refundable tax credit that paid up to 70% of each employee’s qualified wages in tax year 2021. Biden signed the Infrastructure Investment and Jobs Act (IIJA) on November 15, 2021, which retroactively eliminated an employer’s ability to claim employee retention credits (ERC) for eligible wages paid after September 30, 2021. This means an employer’s ability to claim up to $7,000 per quarter per employee changed from $28,000 to $21,000 for 2021.
Early ERC Expiration Considerations
The issue with the early termination of ERC is how it will impact small and mid-sized businesses. Since the effects of COVID-19 continue to linger, many companies depend on the tax credit to stay afloat. The money these businesses are receiving under the ERC is helping them retain their employees and hire new employees.
Employers that anticipated receipt of ERC during the fourth quarter of 2021 may now need to reconsider their tax deposits and budget projections.
If an employer anticipated receiving ERC and retained payroll taxes in the fourth quarter of 2021, the employer may need to investigate any underpaid tax amounts and consider adjustments for potential employment tax compliance issues. The IRS is expected to issue guidance for potential transition relief for potential late deposit penalties and instructions on how employers can pay back any credit advances taken in the fourth quarter of 2021.
There is still one exception for companies that are classified as a “Recovery Startup Business.” Companies that started the business after February 15, 2020, and have gross receipts under $1M, can still qualify for the ERC. They do not have to demonstrate any loss in gross receipts to qualify for the ERC. This is the only type of business eligible for ERC in Q4 of 2021.
Employers previously eligible for ERC that have not yet claimed, or may have incorrectly claimed ERC for qualified wages paid between March 13, 2020, through and including September 30, 2021, can still obtain their ERC funding by amending their quarterly employment tax returns, specifically 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
Increased ERC Support
At Windes, we recognize that the rules related to the ERC have been evolving and that small businesses have struggled to stay updated on them. Many businesses remain confused with both ongoing changes in the law and this early termination.
If you are a business owner looking for assistance navigating the recent ERC changes, talk to the Windes team. We can help determine your next best course of action.
For questions or more information about this article, please contact our tax professionals at taxalerts@windes.com or toll-free at 844.4WINDES (844.494.6337).