Employee Retention Credit Update

On November 15, 2021, President Biden signed into law the Infrastructure Investment and Jobs Act (IIJA), which has effectively ended the Employee Retention Credit (ERC) retroactively as of September 30, 2021, for most businesses.

This does come as a slight surprise as the employee retention credit was originally introduced in the CARES Act in 2020 and has been expanded two additional times through the Consolidated Appropriations Act of 2021 (CAA) and the American Rescue Plan Act of 2021 (ARPA).

Most eligible employers can take advantage of the ERC for the first three quarters of 2021. However, certain businesses can take advantage of qualifying for the fourth quarter (September 30, 2021 through December 31, 2021) if the employer qualifies as a “recovery start up business.”

Recovery Startup Business:

To qualify as a “recovery startup business” regarding the ERC, the business must meet the following criteria:

  • Started operations on or after February 15, 2020
  • Average annual gross receipts that do not exceed $1 million
  • Maintains one of more employees (other than 50% owners)
  • Business does not otherwise qualify for the ERC

There is a credit limit of $50,000 per calendar quarter that applies to recovery startup businesses (after application of the $10,0000 qualified wage limit).

ERC Effects:

In preparation of utilizing the ERC for the fourth quarter of 2021, some employers have been shorting payroll tax deposits to receive the cash flow advantage sooner rather than later. The IRS is expected to issue guidance on how to navigate the repayment of underpaid taxes and other compliance issues that are expected to arise from the retroactive termination.