Section 80604 of the bipartisan Infrastructure Investment and Jobs Act (H.R. 3684) amends Section 3134 of the Internal Revenue Code to terminate the employee retention credit for employers subject to closure for COVID-19 effective October 1, 2021.  The legislation, which passed the House on November 5 (after passing the Senate on August 10), was presented to President Biden for signature on November 8.  It is anticipated that the President will sign the bill soon.

Once enacted, employers may not claim the credit with respect to wages paid after September 30, 2021.  The employee retention credit was adopted as part of the Coronavirus Aid, Relief, and Economic Security Act in April 2020, and was modeled on a similar credit that had been adopted following natural disasters.  The credit was enhanced and extended through June 30, 2021, in December 2020 as part of the Consolidated Appropriations Act.  The credit was then further extended through the end of 2021 and codified in Section 3134 of the Code as part of the American Rescue Plan Act, adopted earlier this year.

The retroactive nature of the suspension creates potential issues for employers who remained eligible for the credit in October and early November.  Employers were permitted to reduce their employment tax deposits (including all withheld federal employment taxes) to take advantage of? the credit.  Accordingly, employers claiming the credit for wages paid in October and November likely did not deposit amounts to reflect the credit.  Those amounts must now be paid.  Because the employer withheld those taxes from its employees (or reduced the deposit of its own share of FICA taxes), the employer could potentially be subject to a late deposit penalty under Section 6656 of the Code.  It is likely, however, that the IRS will provide relief from penalties attributable to the retroactive change.  It is uncertain  how an employer will signal to the IRS that its late deposits are attributable to the retroactive termination of the credit.  In the interim, employers who reduced their deposits in anticipation of the credit should prepare to deposit any amounts that will now be due, as soon as possible.

Tags: American Rescue Plan Act, Consolidated Appropriations Act, Coronavirus Aid Relief and Economic Security Act, Employee Retention Credit, Employee Retention Tax Credit, ERC, ERTC, H.R. 3684, Infrastructure Investment and Jobs Act
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Photo of S. Michael Chittenden S. Michael Chittenden

Michael Chittenden practices in the areas of tax and employee benefits with a focus on withholding taxes, including state and federal employment taxes, Chapter 3, and the Foreign Account Tax Compliance Act (FATCA) and information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2…

Michael Chittenden practices in the areas of tax and employee benefits with a focus on withholding taxes, including state and federal employment taxes, Chapter 3, and the Foreign Account Tax Compliance Act (FATCA) and information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S.

Michael advises large employers on their employment tax compliance obligations, including the special FICA and FUTA rules for nonqualified deferred compensation, the successor employer rules, and executive perquisites, such as the taxation of company cars, corporate aircraft (including the use of SIFL valuations), and employer-provided housing. In addition, he has worked with clients to submit voluntary corrections of employment tax mistakes and seek abatement of late deposit and information reporting penalties. Michael has extensive controversy experience representing clients in IRS examinations and before the IRS Independent Office of Appeals in employment tax, late deposit, and information reporting penalty cases.

As part of Covington’s Global Workforce Solutions practice, Michael counsels clients on all aspects of mobile workforce issues including state income tax withholding for remote workers and mobile employees. He also advises on treaty claims and various tax issues related to expatriate and inpatriates.

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Photo of Marianna G. Dyson Marianna G. Dyson

Marianna Dyson practices in the areas of payroll tax, fringe benefits, and information reporting, with a specific focus on perquisites provided to employees and directors, worker classification, tip reporting, cross-border compensation, backup withholding, information reporting, and penalty abatement.

Marianna advises large employers on…

Marianna Dyson practices in the areas of payroll tax, fringe benefits, and information reporting, with a specific focus on perquisites provided to employees and directors, worker classification, tip reporting, cross-border compensation, backup withholding, information reporting, and penalty abatement.

Marianna advises large employers on the application of employment taxes, the special FICA tax timing rules for nonqualified deferred compensation, the voluntary correction of employment tax errors, and the abatement of late deposit and information reporting penalties for reasonable cause. On behalf of the restaurant industry, her practice provides extensive experience with tip reporting, service charges, tip agreements, and Section 45B tax credits.

She is a frequent speaker at Tax Executives Institute (TEI), the Southern Federal Tax Institute, and the National Restaurant Association.

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