New guidance from the Internal Revenue Service offers employers steps to take if they received an advanced payment from the federal Employee Retention Credit, but are now ineligible. 

In November, the Infrastructure Investment and Jobs Act retroactively ended the ERC, initially set to expire Jan. 1, 2022. 

The tax credit program was created through the Coronavirus Aid, Relief, and Economic Security Act in March 2020 to encourage eligible businesses to keep employees on payrolls. 

Under the Infrastructure Investment and Jobs Act, only recovery startup businesses could continue to keep employees on payroll until the start of 2022. 

The IRS guidance notes that, generally employers who are not startups, and received advance payments for fourth quarter wages can avoid tax penalties if they repay the amounts by the due date of the employer’s applicable employment tax returns. 

Penalty Avoidance

For employers who reduced employment tax deposits on or before Dec. 20, 2021, the IRS said those businesses will avoid a failure to deposit penalty on the retained deposits if the employer:

  1. Reduced deposits in anticipation of the ERC, consistent with IRS rules.
  2. Deposited the amount initially retained in anticipation of the ERC on or before the relevant due date for the wages paid on Dec. 31, 2021, regardless of whether the employer actually paid wages on that date. 
  3. Reports the tax liability resulting from the end of the employer’s ERC on the applicable employment tax return or schedule that includes the period from Oct. 1, 2021 through Dec. 31, 2021.

The IRS noted that employers should refer to the instructions to the applicable employment tax return or schedule for more information about how to file the reports.  

Failure to deposit penalties are not waived for employers if they reduce deposits after Dec. 20, 2021. 

If an employer does not qualify for relief, the IRS will consider reasonable cause relief if the employer replies to the penalty notice with an explanation.