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.