- As part of the Infrastructure Investment and Jobs Act, the Employee Retention Credit will be terminated early
- Businesses could originally claim the credit against employment taxes through the end of the year, but can now only do so up to the third quarter of 2021
- Internal Revenue Service expected to release updated guidance for businesses whose accounting practices anticipated claiming a credit in the fourth quarter
Summary by Dirk Langeveld
A provision tucked into the recently passed Infrastructure Investment and Jobs Act will trim the tax break employers can receive for keeping workers on the payroll during the COVID-19 pandemic.
The bill terminates the Employee Retention Credit early, allowing employers to claim the credit for wages paid until Oct. 1, 2021 rather than Jan. 1, 2022. However, businesses that qualify as a Recovery Startup Business can still claim the credit for the final quarter of 2021.
The Employee Retention Credit was introduced as part of the federal government’s COVID-19 relief measures, allowing employers to receive money as a credit against their employment taxes – effectively regaining a portion of the wages they paid to their employees. The credit was designed as incentive for employers to maintain staffing levels during the economic challenges brought on by the pandemic. It originally applied to the period between March 13 and Dec. 31, 2020, but was extended and expanded under the Consolidated Appropriations Act and American Rescue Plan.
Businesses can claim a credit equal to 70 percent of qualified wages paid to their employees, capped at $10,000 per quarter. This means businesses claiming the credit can receive up to $7,000 per employee per quarter.
The credit is available to businesses with 500 or fewer employees that can demonstrate financial hardship during the quarter, namely an annual decline in gross receipts of at least 50 percent for the 2020 period, a 20 percent decline in gross receipts in 2021 compared to the previous quarter or the same quarter in 2019, or a full or partial suspension of operations due to a government order.
Companies can also qualify as Recovery Startup Businesses for the third or fourth quarter of 2021. They are eligible if they began operations after Feb. 15, 2020; had average annual gross receipts under $1 million for the three-year taxable period before the quarter; and don’t qualify for the Employee Retention Credit based on a reduction in gross receipts.
The early termination effectively means that employers that have not qualified as Recovery Startup Businesses are capped at a maximum credit of $21,000 per employee for 2021 rather than $28,000. However, businesses should also make a note of any steps they took in anticipation of receiving a fourth quarter credit, such as deferring Social Security taxes or retaining payroll taxes since Oct. 1.
The change has raised concerns of potential ramifications such as penalties for not repaying retained payroll taxes in time and the need for employers to repay their share of deferred Social Security taxes. The Internal Revenue Service is expected to release guidance to clarify these issues and how businesses can navigate them.