Guidance on employee retention credit expiration
The employee retention credit expired retroactively and earlier than many employers had anticipated—at the end of the third quarter, instead of the end of the fourth quarter. If, in anticipation of claiming the credit for the fourth quarter, you received an advance by filing Form 7200 or reduced your payroll deposits, you have money you aren’t entitled to and must now pay it back.
According to the IRS’ guidance, the four relevant pay-back dates are:
- Jan. 31, if you received an advance.
- Jan. 3, if you reduced your deposits and you are subject to the $100,000 next-day deposit rule.
- Jan. 5, if you are a semiweekly depositor and reduced your payroll deposits.
- Jan. 18, if you are a monthly depositor and reduced your payroll deposits.
Paying back advances
The full amount of the advances you received for the fourth quarter must be paid back by the due date of your fourth-quarter Form 941—Jan. 31, 2022.
According to the guidance, the procedure for paying back advances should follow the rules in Form 941 instructions. Unfortunately, while the instructions detail how to pay back your deferred deposit of Social Security taxes, they don’t directly address paying back erroneous advances of the employee retention credit.
In light of this ambiguity, we are interpreting the pay-back rules as falling under the Line 14 instructions for dealing with tax underpayments, because technically, an advance to which you’re not entitled is a tax underpayment.
Your safest bet is to pay back the amount in full using EFTPS. If you file your 941 electronically, you can e-file the return and use electronic funds withdrawal to pay the balance due in a single step using your tax preparation software or through your tax pro.
If you can’t pay back the amount in full and your advance was for $25,000 or less, you should be able to apply online for an installment agreement. To apply using the IRS’ Online payment agreement application, go to IRS.gov/OPA.
Paying back reduced deposits
In lieu of receiving an advance of your credit, you could reduce your payroll deposits by the amount of the credit you anticipated receiving. Warning: The IRS will no longer waive failure-to-deposit penalties for employers that reduced deposits after Dec. 20, 2021.
For tax deposits due by Dec. 20, 2021, with respect to wages you paid beginning Oct. 1, 2021, and before Jan. 1, 2022, you won’t be subject to a failure-to-deposit penalty for the fourth quarter if:
- You deposit the full amount you retained on or before the relevant deposit date for wages paid on Dec. 31, 2021, regardless of whether you actually pay wages on Dec. 31, 2021; the deposit date varies, depending on your deposit schedule.
- You report the tax liability resulting from the early termination of the credit on your fourth-quarter 941.
Deposit schedules: Dec. 31 is a Friday. For Friday paydays, tax deposits are due by the next Wednesday—Jan. 5. If you’re a monthly depositor, your due date is Jan. 18.
Take note: The IRS also notes the next-day deposit applies, here. Upshot: If you reduced your payroll deposits by $100,000 or more in anticipation of the credit for the fourth quarter, you must pay back the entire amount by Monday, Jan. 3.
If you don’t qualify for any of this relief, you may reply to a penalty notice with an explanation and the IRS will consider whether you qualify for reasonable cause relief.