The ERC Catch-up Rules are Out!

• December 10, 2021
• Benson P. Theuninck, CPA MBT CCIFP

authored by Perry McGowan

Many contractors enjoyed payroll tax credits from the Employee Retention Credit (ERC) program in 2020 and/or 2021.  Many expected to qualify in Q4 of 2021 right up to November 15 when President Biden signed the Infrastructure Act, and the ERC was retroactively repealed to October 1st.  Contractors that had been reducing their payroll tax deposits in Q4 suddenly found the ERC no longer existed and their payroll taxes were underpaid!  For those businesses, a catch up was needed, but exactly how should that be done to avoid or minimize penalties? 

Well, we now have some answers, thanks to the IRS’s newly issued Notice 2021-65.  First, note that most businesses were not reducing payments or taking advance credits, no remedial action is required there.  Also, for newly formed businesses (known as “Recovery Start-up Businesses”), the ERC may still be claimed in Q4.  But for others who are feeling the retroactive squeeze, corrective guidance and penalty protection is now available if:

1. Employers who requested and received an advance payment of ERC in Q4 repay excess advance payments by the due date of their Q4 employment tax return, or
2. Employers who reduced their deposits in anticipation of Q4 ERC cease any deposit reductions by December 20, 2021, and further, for accumulated deposits due for Q4 wages, penalties can be avoided if
   • Payroll taxes due are deposited on or before the employer’s tax deposit due date for wages paid on December 31, 2021 (whether or not the employer actually pays wages on that day), 
   • The deposit reductions in Q4 were consistent with ERC rules, AND
   • The full tax liability without ERC is reported as payroll tax for the quarter.

If the accumulated payroll tax in arrears exceeds $100,000, the One-Day remittance rule would apply to the December 31 deposit noted above, so double check and don’t be late!

Since the guidelines in this Notice are a practical safe harbor, contractors should get caught up in the coming weeks.  If these rules do not apply to your situation, there is still room to request penalty abatement under general rules for reasonable cause relief, but these payroll penalties can get painful, so why not take the safe path? 

For the full story, review IRS Notice 2021-65 or contact your CLA trusted advisor for assistance.

, Construction General, Construction Tax | Comments Off on The ERC Catch-up Rules are Out!