On Dec. 6, 2021, the Internal Revenue Service (IRS) issued guidance that provides penalty relief for employers that received an advance payment or reduced their employment tax deposits regarding the Employee Retention Credit (ERC) for the fourth quarter of 2021. Employers were awaiting guidance because the Infrastructure Investment and Jobs Act enacted on Nov. 15, 2021, amended the law so that the ERC applies only to wages paid before Oct. 1, 2021, (unless the employer is a recovery startup business) and some employers have already begun participating in the ERC for the fourth quarter of 2021.
Originally, the ERC was supposed to remain valid through Dec. 31, 2021. However, in Notice 2021-65, the IRS advises that non-recovery startup businesses who paid wages after Sept. 30, 2021, and received an advance payment of the ERC for those wages will need to repay those amounts by the due date of the applicable employment tax returns in order to avoid failure to pay penalties.
In addition, non-recovery startup employers that reduced their deposits due between Oct. 1, 2021, and Dec. 31, 2021, by the amount of an ERC they anticipated claiming must now deposit those taxes. Penalties for failing to deposit those taxes may be waived, but only for those deposits due prior to Dec. 20, 2021. The waiver of such penalties is subject to several conditions. If employers do not qualify for a waiver, the IRS may provide reasonable cause relief if employers reply to a notice about a penalty with a satisfactory explanation.