September 30th was the day that the Infrastructure Investment and Jobs Act (the “infrastructure bill”) would end the Employee Retention Tax Credit (ERTC) early for most employers. The bill passed the Senate, but the House has yet to pass it. In addition, September 30, 2021, is the last day that leave had to be taken under the Families First Coronavirus Response Act (FFRCA), as extended under the American Rescue Plan Act (ARPA). An employer could still claim the credit for wages paid after September 30th, but those wages must have been for leave taken by September 30th to claim the credit. Below is a detailed update on both issues.
The termination of the Employee Retention Tax Credit
As part of the tax provisions contained in the infrastructure bill, Congress has included a provision that would end the ERTC one quarter early (September 30, 2021) for all employers except those eligible as a “recovery startup business.” The Senate passed this bill on August 10, but the House has yet to pass it. This proposal is caught in a bigger political dispute among Democrats about spending priorities. Speaker Nancy Pelosi has stated that the House will vote on final passage of the Infrastructure bill “before October 30.” However, the House is on recess until October 19, so that would be the earliest the bill could pass.
What does this mean for PEOs?
It remains a high probability that the infrastructure bill will pass at some point, including the provision that would terminate the ERTC at the end of Q3 2021. If the bill passes, there is no clear answer at this time how any advance payments of an anticipated Q4 credit, including through the reduction of payroll tax deposits during the quarter, would be handled in the event of a retroactive early termination of the ERTC. Some things that PEOs may want to consider include:
Whether to strongly discourage or disallow clients from taking advantage of the option to reduce payroll tax deposits in anticipation of a Q4 credit.
Whether to strongly discourage clients from requesting an advance payment using Form 7200 in Q4, and how to handle a situation where a client nevertheless receives an advance payment via Form 7200 and the bill later passes.
Communicating to clients that, if the ERTC remains available for Q4, it can be claimed following the end of the quarter using the refund process on the 941 (or 941-X).
It seems unlikely that the IRS would penalize anyone who took an advance of the ERTC for Q4 before Congress acts, but the unwinding process will likely be complicated, especially if a PEO needs to get money back from clients.
PEOs will want to consider the ongoing ambiguity regarding PEO liability for improper credits, although we do have the quasi favorable PEO liability language for Q4 2021. Of course, we also have the language that says the PEO must follow client instructions. Further complicating these liability/follow instruction issues is the fact that both of those rules might arguably go away with repeal.
Tax credits for paid leave under Families First Coronavirus Response Act (FFRCA), as extended under the American Rescue Plan Act (ARPA)
Employers with fewer than 500 employees and certain governmental employers without regard to the number of employees may be eligible for tax credits for qualified sick and family leave wages paid with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021. With the ability to obtain tax credits for leave no longer possible, questions have been raised by NAPEO members about these credits. Your first stop on any questions should be the FAQs page on the IRS website. In particular, you should make sure you check the FAQs for third-party payroll processors. With regard to wages paid after September 30, 2021, the IRS has addressed this in its FAQs as stated here:
“Are wages paid after September 30, 2021, qualified leave wages for purposes of the credit if paid for leave taken before September 30, 2021? (added June 11, 2021) Yes. Wages paid after September 30, 2021, may be qualified leave wages under the ARP so long as the wages are paid with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021.”