When the Infrastructure Investment and Jobs Act was signed into law on November 15, 2021 the Q4 Employee Retention Credits (“ERCs”) were eliminated for most businesses. Only recovery startup businesses that began operations February 15, 2020 or after and meet certain criteria would be able to continue to qualify for Q4 ERCs, and the amount is limited to a $50,000 maximum for the business for the quarter.
Because the Senate bill that passed in August included the removal of Q4 ERCs, many businesses elected to not use ERCs in calculation of their payroll tax liability for Q4 941 payments. Those businesses will not be impacted by the change in ERC eligibility for Q4, unless their cash flow or financial forecast included the cash flow benefits of Q4 ERC eligibility and their lender tests performance to plan or the business needed those credits to fund its operations.
Businesses that elected to use ERCs in Q4 will need to wait for IRS guidelines, expected to be published shortly, to determine the financial impact of reduced 941 payments in the fourth quarter. When the IRS rules whether Q4 ERC eligibility is eliminated beginning October 1, 2021 or Q4 eligibility is eliminated beginning November 15, 2021, businesses will need to evaluate the cash flow and financial performance impacts of lower ERCs. The IRS is also expected to rule on interest and penalty costs related to reduced 941 payments. Businesses that have used Q4 ERCs will need to work with their payroll providers and their accounting firm to monitor IRS rules and to ensure compliance with the updated guidelines. The cash flow of these businesses will be impacted by the amount of eliminated ERCs and any penalties associated with the underpayment of payroll taxes.