Initially, wages and health plan expenses eligible for the ERC were those paid prior to Jan. 1, 2022, but last month’s enactment of the Infrastructure Investment and Jobs Act ended the availability of the ERC for most employers for the entirety of Q4 2021. (Employers designated as recovery startup businesses (“RSBs”) will continue to be eligible for ERCs for wages and/or health plan expenses paid through Dec. 31, 2021, and are exempt from the provisions of the Notice; any use of “employers” throughout this alert can be read as “employers that do not qualify as RSBs.”)
Although the Senate version of the Infrastructure Act passed in August included the early termination of the availability of the ERC, providing an indication that the ERC could be eliminated for Q4 2021, some employers somewhat aggressively 1) continued to reduce their federal employment tax deposits in anticipation of ERCs for wages and/or health plan expenses paid through Dec. 31, 2021, and/or 2) filed Form 7200 to claim advances on their anticipated ERCs for wages and/or health plan expenses paid through Dec. 31, 2021. Notice 2021-65 provides guidance for those businesses.
Repayment of advance payments
Employers that filed Form 7200 (“Advance payment of employer credits due to COVID-19”) to claim advances on anticipated ERCs for Q4 2021 must repay those amounts by Jan. 31, 2022, the deadline for Q4 2021 federal employment tax returns. Failure to do so may result in failure to deposit penalties.
The Notice directs the taxpayer to instructions in Form 941 (“Employer’s QUARTERLY federal tax return”) for further information. On Dec. 16, the IRS released, in draft form, revised instructions for Form 941 that state that taxpayers who filed Form 7200 and received advanced payments of anticipated ERC credits must include the erroneously received credit on Form 941, Part 1, Line 13h for the fourth quarter of 2021. (If there are any changes as the instructions are finalized, we will update this page accordingly.) Again, any balance due must be paid by Jan. 31, 2022.
Failure to deposit penalties
Employers that reduced their federal employment tax deposits for wages and/or health plan expenses paid during Q4 2021 will not incur failure to deposit penalties for those reductions if:
- The employer reduced its deposits in anticipation of an ERC, consistent with the guidance previously provided in Notice 2021-24; and
- The employer deposits the owed federal employment taxes on or before the relevant due date for wages paid on Dec. 31, 2021; and
- The employer reports the tax liability on its Form 941 for Q4 2021. Per the IRS’s Dec. 16 draft, this liability should be reported on Form 941, Line 16, Month 3. If the taxpayer is a semiweekly depositor, the liability should be reported on Schedule B “for the applicable day or days in December (month 3) for the fourth quarter of 2021.”
The Notice advises that the IRS will not waive failure to deposit penalties for employers that reduce their federal employment tax deposits after Dec. 20, 2021, in anticipation of an ERC.
The Notice further provides that employers that may not qualify for penalty relief under the above guidelines may reply to a penalty notice with an explanation and under such circumstances the IRS will consider penalty abatement under reasonable cause relief.
What does CohnReznick think?
Employers that are not RSBs but retained otherwise required federal employment tax deposits and/or claimed advances by filing Form 7200 should immediately work with their payroll providers to take the actions specified under the Notice.
Subject matter expertise
JD, LLM, Managing Director - National Tax Services
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