The Infrastructure Investment and Jobs Act ended the employee retention credit three months early.
- The ERC is a tax incentive created so that employers would retain more employees during the pandemic.
- The credit was extended until the end of 2021, but the Infrastructure Investment and Jobs Act signed on November 15, 2021, ended the ERC early.
- Wages paid after September 30, 2021, no longer qualify for the credit.
- Businesses need to reevaluate payroll and may have to pay back any payroll taxes retained in anticipation of the credit for fourth-quarter wages.
The last couple of years brought several new laws that include changes to tax law and assistance programs for both individuals and employers. Running a business in this landscape demands paying close attention to what’s been passed, so you always stay compliant.
President Biden signed the Infrastructure Investment and Jobs Act into law on November 15, 2021. The legislation includes allocating funds to rebuild roads, bridges, water systems, and the internet, among other infrastructure priorities, and also aims to address climate change and transportation safety. In addition, the law eliminated the employee retention credit (ERC) for wages paid in Q4 of 2021. This means eligible employers get a lower credit for the year and may have to look back at payroll retroactively.
Here are the details of the ERC and what the new legislation means for businesses.
What is the ERC?
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020 first introduced the ERC as a form of relief during the COVID-19 pandemic. The subsequent Consolidated Appropriations Act of 2021 (CAA) and the American Rescue Plan Act of 2021 (ARPA) expanded eligibility requirements and extended the ERC for qualified wages employers paid workers through the end of 2021.
The ERC was implemented as an incentive for employers to retain workers, as record numbers of businesses had to pause or stop operations, and many people were laid off. Employers were now able to receive both a Paycheck Protection Program (PPP) loan and the ERC, though they couldn’t pay qualified wages with funds from the PPP loan.
In 2020, the refundable credit was 50% of up to $10,000 in qualified wages paid per employee, with a maximum credit of $5,000 per employee for the year.
In 2021, the credit was raised to 70% of qualified wages up to $10,000 paid per employee, and the maximum credit was increased to $7,000 per employee per quarter—reaching a max of $28,000 for the whole year.
Eligible employers can claim the ERC retroactively to March 27, 2020, using Form 941-X, Amended Quarterly Payroll Tax Return, within three years after the initial return filing date.
To qualify, businesses:
- Must have been partially or fully closed because of government pandemic restrictions; or …
- Gross receipts were 50% less for the same quarter in 2019 for the 2020 credit and 20% less for 2021. If a business wasn’t operating in 2019, it could compare its gross receipts to the same quarter in 2020.
The CAA 2021 changes also opened up the credit to public colleges and universities, medical or hospital care organizations, and Congress-chartered organizations.
What are qualified wages?
There are different qualifying wage requirements for the last two years. For 2020, employers with 100 employees or fewer can claim wages for all employees, whether or not they are working. If there are more than 100 full-time workers, only wages for retained employees who aren’t working can be claimed. For 2021, these thresholds were increased to 500 full-time employees.
However, note that the ERC can apply to full-time, part-time, seasonal, or other bases, as long as the employer meets the necessary qualifications.
What changed under the Infrastructure Investment and Jobs Act?
With the elimination of the ERC under the Infrastructure Investment and Jobs Act, any wages paid by an employer to employees after September 30, 2021, are not eligible. So, the ERC was essentially ended three months early. This means that the maximum credit per employee is $21,000 in 2021 or $7,000 per quarter for Q1 through Q3.
There is an exception: if your business is a recovery startup, you may still be able to take the ERC for the last quarter of 2021. These businesses started operating after February 15, 2020, and have less than $1 million in average annual gross receipts for the prior three-year tax period.
What do the changes mean for employers?
This change may cause some confusion for employers, especially since the bill was signed in November and ends the ERC retroactively, beginning October 1, 2021. Business owners should ensure that they coordinate with payroll and make any necessary changes to Form 941. It’s possible that businesses will have to repay any payroll taxes retained to anticipate the credit.
It’s also important to plan for that $7,000 reduction in the credit per employee for the year, as the maximum credit per worker went from $28,000 to $21,000. This could hit some employers pretty hard.
Turn to Provident CPA & Business Advisors with questions
If the elimination of the ERC impacts you, it’s a good idea to meet with a tax professional who can guide you forward. You never want to miss any essential rule changes that could cost your business, now or in the future.
Get in touch with Provident CPA & Business Advisors to talk to a tax expert about your obligations and options.