The Employee Retention Credit (ERC), in place since March 2020, was phased out three months early with the November 15th passage of the Infrastructure Investment and Jobs Act (IIJA). The ERC, set to expire at the end of 2021, now applies only to wages paid through September 30, 2021, unless the employer is a recovery startup business.

Because this expiration occurred retroactively, employers may have been making payroll tax deposits at a level that anticipated fourth quarter credits. The IRS recently released Notice 2021-65 (the Notice) to address repayment of the taxes now owed for the fourth quarter.

Specifically, the Notice provides:

• Employers who already received an advance payment of the fourth quarter credit, and who are not a recovery startup business, must repay the amount by the due date for the fourth quarter employment tax return or be subject to failure-to-pay penalties.

• Employers who reduced fourth quarter deposits in anticipation of claiming the credit on the fourth quarter return, but are no longer eligible for the credit, will not be subject to failure-to-deposit penalties for deposits due on or before Dec. 20, 2021 if the deposits are submitted by the due date for wages paid on Dec. 31, 2021, according to the employer’s deposit schedule, and they report the liability on the quarterly employment tax return per instructions.

• Employers who do not qualify for penalty relief under the Notice may provide a reasonable cause explanation upon receipt of an IRS notice of a failure to deposit penalty.

Taxpayers who proactively claimed the ERC for the fourth quarter should review their records and speak with their payroll providers, if applicable, to address any payments needed and ensure that they meet the deadlines for penalty relief.

Our expert team of state and local tax professionals at Geffen Mesher is ready and prepared to help navigate this credit for your business and can be reached at SALT@gmco.com.