Employee retention payroll tax credit repealed for Q4 2021

Background on the ERC

The ERC first became law as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was enacted on March 27, 2020, to provide eligible employers with an elective refundable and advanceable payroll tax credit that applies against the employer 6.2% Social Security tax for the second through fourth calendar quarters of 2020.

The Consolidated Appropriations Act, 2021 (CAA), enacted on Dec. 27, 2020, expanded the ERC and extended it to the first two calendar quarters of 2021. Read an earlier article for information on the CARES Act ERC and its amendments under the CAA.

The American Rescue Plan Act (ARPA), enacted on March 11, 2021, effectively created a new version of the ERC by adding the credit, for the first time, to the IRC along with some significant changes, such as:

• Applying the ERC against the employer 1.45% Medicare tax
• Extending the IRS statute of limitations to five years
• Adding as a new type of eligible employer a “recovery startup business,” which is a trade or business (as determined under applicable aggregated group rules) that began after Feb. 15, 2020, and averaged annual gross receipts of $1 million or less during the three taxable years ending with the taxable year preceding the calendar quarter for which the ARPA ERC is determined

The ARPA ERC, as enacted, applies to the third and fourth calendar quarters of 2021.

Infrastructure Act repeal

The Infrastructure Act eliminates from the ARPA ERC wages paid after Sept. 30, 2021, by eligible employers other than recovery startup businesses and, as a result, repeals the credit for the last calendar quarter in which it was originally available (other than for recovery startup businesses).

Even though the fourth calendar quarter of 2021 began on Oct. 1, Congress took the unusual step of retroactively changing the effective date of a tax law. (The ARPA ERC for the third calendar quarter of 2021 is unaffected.)

Considerations

The advanceable feature of the ERC means that certain employers that had determined eligibility for the fourth calendar quarter of 2021 may have offset payroll deposit amounts due since Oct. 1, 2021. These offsets could be against not just the payroll tax to which the credit applies but all other payroll taxes. Guidance likely is needed from the U.S. Department of the Treasury and the IRS to address payroll tax administration issues and penalties that could otherwise result from retroactively repealing the credit.