Fourth Quarter 2021 Update: Early termination of the employee retention credit for most employers

The Infrastructure Investment and Jobs Act (Infrastructure Act) amends section 3134 of the Internal Revenue Code, as enacted under the American Rescue Plan Act of 2021 (the ARP), to limit the availability of the employee retention credit in the fourth quarter of 2021 to employers that are recovery startup businesses, as defined in section 3134(c)(5). Thus, for wages paid after September 30, 2021, and before January 1, 2022, only the wages paid by recovery startup businesses can be qualified wages.

A recovery startup business is an employer that:

Began carrying on a trade or business after February 15, 2020;
Had average annual gross receipts of $1 million or less for the 3 tax years ending with the tax year before the calendar quarter in which the employee retention credit is claimed; and
Only for credit claimed in the third quarter of 2021, isn't otherwise eligible for the employee retention credit because business operations aren't fully or partially suspended due to a governmental order or because gross receipts (within the meaning of section 448(c) or, if you're a tax-exempt organization, section 6033) aren't less than 80% of the gross receipts for the same calendar quarter in calendar year 2019.

For the fourth quarter of 2021, you must check the box on line 18b if you're a recovery startup business claiming the employee retention credit.

Due to the termination of the employee retention credit for the fourth quarter of 2021 for employers that aren't recovery startup businesses, the IRS will no longer waive failure-to-deposit (FTD) penalties for employers that reduce deposits in anticipation of the employee retention credit after December 20, 2021, unless the employer is a recovery startup business. Some employers that are no longer eligible to claim the employee retention credit for the fourth quarter of 2021 may have already reduced their employment tax deposits in anticipation of claiming the employee retention credit for the fourth quarter of 2021. For deposits due on or before December 20, 2021, with respect to wages paid on or after October 1, 2021, an employer that isn't a recovery startup business won't be subject to an FTD penalty for the fourth quarter of 2021 if the employer:

Reduced its deposits in anticipation of the employee retention credit, consistent with the rules provided by section 3.b. of Notice 2021-24, 2021-18 I.R.B. 1122,
Deposits the amounts initially retained in anticipation of the employee retention credit on or before the due date of the deposit for wages paid on December 31, 2021 (regardless of whether wages are actually paid on that date); and
Reports the tax liability associated with the termination of the employer's employee retention credit on Form 941, line 16, month 3, or, if a semiweekly schedule depositor, on Schedule B (Form 941) for the applicable day or days in December (month 3) for the fourth quarter of 2021. For more information, see the line 16 instructions, later.

Some employers that are no longer eligible to claim the employee retention credit for the fourth quarter of 2021 may have already submitted Form 7200 to request an advance payment of the employee retention credit for the fourth quarter of 2021. If the Form 7200 hasn't been processed, the IRS will use the employer's indication of whether it is a recovery startup business (Form 7200, Part 1, line H) as part of the determination regarding whether the Form 7200 claiming the employee retention credit in the fourth quarter of 2021 should be accepted or rejected. A refund or credit of any portion of the employee retention credit to a taxpayer in excess of the amount to which the taxpayer is entitled is an erroneous refund that the employer must repay, regardless of whether the refund or credit is advanced. Accordingly, if an employer requested and received an advance payment of the employee retention credit for the fourth calendar quarter of 2021, and the employer isn't a recovery startup business, the employer isn't eligible for an employee retention credit and must repay the amount of the advance. Employers who need to repay excess advance payments of the employee retention credit must do so by January 31, 2022, by including the advance payment on Form 941, Part 1, line 13h, for the fourth quarter of 2021 and paying any balance due by January 31, 2022.

e-File Form 941

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Tax-Me, LLC to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her tax professional prior to taking any action based upon this information. Tax-Me, LLC assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.