The IRS has granted a reprieve for employers who received employee retention credit (ERC) payments or underpaid their employment tax deposits in the fourth quarter of 2021.

In Notice 2021-65, the agency said ERC beneficiaries may make those payments without penalty. That clarification had been anticipated since the recent passage of the Infrastructure Investment and Jobs Act (IIJA), which disallowed the application of the ERC for the fourth quarter of 2021.

As a result of the ERC’s early demise, wages paid by an eligible employer after September 30 would not be eligible for the credit. That was a surprise to employers who had reduced their monthly or semi-weekly payroll tax deposits in anticipation of receiving the ERC tax break for three more months.

But based on the new guidance, employers will not be penalized for incorrect payroll tax payments made prior to December 20, 2021.

Three other conditions apply for employers to avoid those penalties:

  • The employer abided by rules of Section 3.b. of Notice 2021-24 in paying its reduced tax deposits
  • The employer deposits the amounts it had retained in anticipation of claiming the ERC on or before the relevant due date for employment taxes with respect to wages paid on December 31, 2021 — regardless of whether the employer pays wages on that date
  • The employer reports the tax liability resulting from the termination of the employer’s ERC on the applicable employment tax return or schedule that includes the period from October 1, 2021, through December 31, 2021

The ERC was created as part of the CARES Act in March 2020, a response to businesses that struggled in the COVID-19 pandemic. It was amended and extended multiple times.

Pandemic-related stimulus programs have resulted in plenty of questions and confusion for business owners, but we can help. Contact me or a member of our tax team to help guide you through the red tape.

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