President Biden’s signing of the Infrastructure Investment and Jobs Act (IIJA) on November 15, 2021, retroactively eliminates an employer’s ability to claim employee retention credits (ERC) for eligible wages paid after September 30, 2021. This means the maximum ERC per employee available to an eligible employer in the tax-year 2021 is $21,000, not $28,000.

Background

The Coronavirus Aid, Relief, and Economic Security Act (CARES) Act provided a refundable employment tax credit for eligible employers paying qualified wages and health plan expenses. This tax credit was available for any employer whose business operations were fully or partially suspended due to orders from a governmental authority or an employer with a significant decline in gross receipts.

Originally, the covered period for the ERC under the CARES Act was March 13, 2020, to December 31, 2020, with a maximum ERC of up to $5,000 per employee. Subsequent legislative acts both extended and expanded the ERC:

• The Consolidated Appropriations Act, 2021 (CAA), effective December 27, 2020, extended the ERC to include wages paid before July 1, 2021, and expanded the maximum ERC to $7,000 per employee per quarter.

• The American Rescue Plan Act of 2021 (ARPA), effective April 1, 2021, extended the coverage period to include wages paid between July 1, 2021, and December 31, 2021.

The Internal Revenue Service (IRS) previously issued guidance on claiming the ERC in the third and fourth quarters of 2021 (Notice 2021-49) with a caveat that it “will continue to monitor potential legislation related to the employee retention credit that may impact certain rules described in this notice.”

Key Considerations for Employers

The repeal of the ERC by the IIJA as of September 30, 2021, will affect employers that anticipated receipt of the ERC during the fourth quarter of 2021. For example, certain employers likely reduced their tax deposits in anticipation of the ERC. Other employers may have accounted for the ERC in budget projections. Accordingly, if an employer retained payroll taxes in anticipation of receiving the ERC in the fourth quarter of 2021, the employer may want to determine any underpaid tax amounts and identify employment tax compliance issues.

The IRS may issue guidance providing for transition relief from late deposit penalties and/or instructions on how employers are to pay back any credit advances taken in the fourth quarter of 2021. Notably, a “recovery startup business” as defined in the ARPA may continue to claim the ERC for the remainder of fourth quarter.

Eligible employers that have not yet claimed (or incorrectly claimed) any ERC for qualified wages paid between March 13, 2020, through and including September 30, 2021, may still obtain the ERC by amending their quarterly employment tax returns, i.e., Forms 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.