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Employee Retention Credit Ends Earlier Than Expected

On November 5, The House of Representatives passed the $1.2 trillion bipartisan infrastructure bill. It is expected to be signed by President Biden this week. Known as the Infrastructure Investment and Jobs Act, it ends the Employee Retention Credit earlier than expected. Here’s what you need to know.

Employee Retention Credit Deadline Changes

The Employee Retention Credit (ERC) is a refundable tax credit that provides financial relief to eligible employers who keep their employees on the payroll. First introduced under the CARES Act, the tax credit was worth 50% of qualified wages and applicable health plan costs (up to $10,000) per employee paid between March 13, 2020, and December 31, 2020.

The Consolidated Appropriations Act of 2021 increased the ERC to 70% of qualified wages. It also raised the cap to $10,000 per employee per quarter, making the credit as high as $7,000 per employee. In March 2021, the American Rescue Plan extended the credit through December 31, 2021.

Under the new Infrastructure Investment and Jobs Act, however, most employers can no longer take the tax credit for wages paid after September 30, 2021.

Are There Any Exceptions?

Although most employers will no longer be eligible to take the ERC in Q4 of 2021, those considered “recovery startup businesses” can take the tax credit through the end of the year. To qualify, businesses must meet the following requirements:

  • Started operations on or after February 15, 2020;
  • Have annual gross receipts that do not exceed $1 million;
  • Have at least one or more employees; and
  • Do not otherwise qualify for the Employee Retention Credit.

Recovery startup businesses can claim the ERC in Q3 and Q4. Unlike other employers, however, the total per quarter for qualified wages is capped at $50,000.

Additionally, previously eligible employers can still retroactively claim the Employee Retention Credit for qualified wages paid prior to September 30, 2021.

Will Businesses Be Charged Penalties For Reduced Deposits?

The passage of the infrastructure bill comes well after the new deadline of September 30, 2021, which could create some issues for those who already reduced their payroll deposits going into Q4. It’s unclear whether they may face late deposit penalties or be required to repay funds. The IRS, however, will likely provide some type of relief to help those caught off-guard by the shortened ERC deadline. Employers should be on the lookout for additional guidance on this subject over the next few weeks.