In11819 Early Sunset Employee Retention Credit
Summary
A Congressional Research Service Insight, IN11819, titled Early Sunset of the Employee Retention Credit and updated December 8, 2021. It explains that the Infrastructure Investment and Jobs Act (P.L. 117-58) moved the credit's termination date forward to September 30, 2021, from December 31, 2021, for businesses other than recovery startup businesses. It traces the credit's history through the CARES Act (P.L. 116-136), P.L. 116-260 and the American Rescue Plan Act of 2021 (P.L. 117-2), including the change in maximum credit from $14,000 to $28,000 for 2021. It then summarizes IRS guidance requiring repayment of fourth-quarter advance payments and conditions for waiving failure to pay penalties. The Insight is authored by two CRS analysts in public finance.
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INSIGHTi
Early Sunset of the Employee Retention
Credit
Updated December 8, 2021
The Employee Retention Credit (ERC) was designed to help employers retain employees during the
Coronavirus Disease 2019 (COVID-19) public health emergency. The Infrastructure Investment and Jobs
Act (IIJA, P.L. 117-58) moved the termination date for the credit forward, to September 30, 2021, from
December 31, 2021. This change effectively repeals the ERC for the fourth quarter of 2021 for businesses
other than recovery startup businesses. Some employers may have anticipated receiving the ERC for the
fourth quarter (the IIJA was signed into law on November 15, 2021), and therefore either underpaid their
employment tax liability or received an advance refund from the IRS. IRS guidance provides that
taxpayers who received ERC advance payments in the fourth quarter of 2021 must repay those amounts.
The IRS also provided relief from late deposit penalties for employers that reduced payroll tax deposits in
anticipation of receiving the ERC in the fourth quarter of 2021.
Employee Retention Credit: Summary and Legislative
History
The credit was first enacted in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, P.L.
116-136) in March 2020. The ERC allowed businesses to claim a refundable credit against their payroll
tax liability for a percentage of wages they paid to workers after March 12, 2020, and before January 1,
2021. Initially, the credit was 50% of up to $10,000 in qualifying wages. Eligible employers included
those who (1) were required to fully or partially suspend operations due to a COVID-19-related order
(including nonprofit employers); or (2) had gross receipts 50% less than gross receipts in the same quarter
in the prior calendar year (with the credit no longer available once gross receipts were 80% of prior year
calendar quarter gross receipts). Eligible employers included tax-exempt organizations. Employers with
more than 100 full-time employees could only claim the credit for wages paid when employee services
were not provided. Employers with 100 or fewer full-time employees could claim the credit for any
otherwise qualifying wages that were paid.
The credit was structured so that employers could be reimbursed when processing payroll by reducing
required deposits of payroll taxes by the anticipated amount of the credit. Many businesses make regular
payroll tax payments with their payroll cycle (e.g., biweekly). The credit was also advanceable, meaning
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IN11819
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that businesses expecting credit amounts in excess of payroll tax liability could file for an advance
payment from the IRS. These reductions in payroll taxes paid and advance payments were then reconciled
with the business’s actual payroll tax liability and ERC amount on quarterly payroll tax filings with the
IRS.
The ERC was subsequently extended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020
(Division EE of the Consolidated Appropriations Act, 2021, P.L. 116-260), which applied to wages paid
from January 1, 2021, through June 30, 2021. P.L. 116-260 increased the maximum credit available from
$5,000 (50% of $10,000 in qualifying wages) to $14,000 (70% of $20,000 in qualifying wages). The
legislation modified the eligibility such that employers that had gross receipts 20% less than gross
receipts in the same quarter in the prior calendar year or prior calendar quarter could qualify. The
threshold below which employers could claim the credit for all wages paid, as opposed to claiming it for
wages paid only when services were not provided, was increased to 500 full-time employees.
The ERC Before the IIJA Modification
The most recent ERC extension was in the American Rescue Plan Act of 2021 (ARPA, P.L. 117-2). When
ARPA became law in March 2021, the ARPA ERC applied to wages paid between July 1, 2021, and
December 31, 2021. Under ARPA, a credit of 70% on up to $10,000 in wages was allowed for the third
and fourth quarters of 2021. Thus, under ARPA, the maximum credit amount for 2021 was increased from
$14,000 to $28,000 (or $7,000 per quarter for the full 2021 calendar year). A credit of up to $50,000 per
calendar quarter was also provided to recovery startup businesses, defined as businesses established after
February 15, 2020, with average annual gross receipts that do not exceed $1 million. Severely financially
distressed employers, those with gross receipts that were less than 10% of what they were in the same
calendar quarter in 2019, were able to treat all wages as qualifying wages.
Early Sunset in the Infrastructure Investment and Jobs
Act
The Infrastructure Investment and Jobs Act (IIJA, P.L. 117-58), signed into law by President Biden on
November 15, 2021, changed the dates of the ARPA ERC extension. Specifically, the IIJA changes the
ERC to apply to wages paid between July 1, 2021, and September 30, 2021 (unless the wages are paid by
an employer that is a recovery startup business).
The IIJA passed the Senate on August 10, 2021. At that time, the proposed change to the ERC would have
been a future change, rather than a retroactive one. However, the House passed the Senate version of the
act on November 5, 2021, and it was signed into law by President Biden on November 15, 2021. This
caused what would have been a prospective change in tax law to be a retroactive change in tax law.
Because the retroactive repeal of the ERC did not occur until mid-November, some employers may have
already taken action regarding fourth quarter employment taxes with the expectation that the ERC would
still be available.
What Can Businesses Do?
The IRS released guidance for businesses other than recovery startup businesses that anticipated receiving
the ERC for the fourth quarter. Employers that requested and received an advance refund of the ERC for
the fourth quarter must repay the amount by the normal due date of their employment tax return (for many
employers, this will be January 31, 2022).
Congressional Research Service 3
Other employers may have reduced their regular payroll deposits during the quarter by the amount they
expected to receive from the ERC. The IRS will waive failure to pay penalties for employers who
anticipated receiving the ERC between October 1, 2021, and December 20, 2021, if the employer
1. Reduced deposits accurately for the expected ERC amount,
2. Deposits the amounts initially retained by the normal due date (for many employers, this
will be January 31, 2022), and
3. Reports the tax liability due on the full amount of wages paid during regular filing.
Author Information
Anthony A. Cilluffo Molly F. Sherlock
Analyst in Public Finance Specialist in Public Finance
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
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IN11819 · VERSION 2 · UPDATED
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