The Infrastructure Investment and Jobs Act ended the employee retention credit (ERC) for periods after September 30, 2021, except for recovery startup businesses. As the ERC had previously been extended through 2021, employers may have already requested advanced payments or reduced payroll deposits for Q4 2021.

Notice 2021-65, issued on December 6, 2021, addresses how and when employers may repay these amounts to avoid failure to deposit or pay penalties.

What If You Received Advance Payments for the ERC?

When a taxpayer receives an advance payment, they are receiving actual cash refunds. Any advance payment received to which the taxpayer was not entitled, even if eligible when originally filed, is considered an erroneous refund that must be repaid. Failure to repay the advance payment may result in penalties.

In terms of advance payments for Q4 ERC, Notice 2021-65 states that to avoid penalties employers must repay the advance payment by the due date for the applicable employment tax return that includes the Q4 calendar quarter of 2021.

What If You Reduced Your Employment Tax Deposits?

Employers who fail to make the proper deposits of employment taxes can be subject to failure to deposit penalties. Treasury had released previous guidance that waived these penalties for certain employers who had reduced their deposits in anticipation of receiving the ERC.

The new notice indicates that the failure to deposits will no longer be waived after December 20, 2021, except for an employer that qualifies as a recovery startup business. In addition, the notice provides that an employer will not be subject to a penalty for deposits due on or before December 20, 2021, for wages paid in Q4 of 2021 if the employer:

1. Reduced deposits in anticipation of the ERC as provided in Notice 2021-24;
2. Deposits the amounts they had previously retained on or before the due date for wages paid on December 31, 2021 (due date varies based on employers’ deposit schedules); and
3. Reports the tax liability resulting from the termination of the ERC on the applicable employment tax return, per the form instructions.

If an employer fails to qualify for penalty relief under one of the options above, they may request relief for reasonable cause. The employer must request relief in writing after receiving a penalty notice and must include an explanation in their statement.

While the government may grant reasonable cause requests in light of the circumstances surrounding the early sunset of the ERC, employers’ easiest path to avoid potential penalties is to fall within the relief provided in Notice 2021-65.

Contact Robert Venables at rvenables@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.