Accounting for the COVID-19 employee retention credit limitation in your federal tax return


By: Ryan Giggi

As we embark on another tax season, Americans from coast to coast will once again need to navigate a complex and ever-changing web of COVID-19 related law on their federal tax returns. One important change particularly impacting employers and their accountants is the recent limitation of the Employee Retention Tax Credit (“the Credit”). The Credit became available during the 2020 tax year to businesses, including tax-exempt organizations, that experienced any sort of shutdown (for employers averaging more than 100 employees during 2019) or significant losses in gross receipts due to COVID-19 (for employers averaging fewer than 100 employees during 2019).

Subject to other tax provisions for COVID relief, eligible employers could recoup their tax liability against certain employment taxes up to 50% of the qualified wages and healthcare costs that they paid to their employees, up to $10,000 per employee, from March 12, 2020 through December 21, 2020. Such employers could also receive advance Credit payments or retain monies otherwise owed in tax in anticipation of the Credit. The Infrastructure Investment and Jobs Act, signed into law by President Biden on November 15, 2021, limits the Credit for all employers (except recovery startup businesses) to wages paid before October 1, 2021. Effectively, this means that the Credit does not apply to wages paid in the fourth quarter of the 2021 tax year. Impacted employers that received advance Credit payments for the fourth quarter of 2021 must accordingly repay those amounts.

Further, employers who reduced their employment tax deposits in anticipation of Credit will need to report the amounts that they retained in anticipation and report the fourth quarter difference on their federal tax returns. To close with a best practice tip, remember to document throughout the course of the year each decision that may impact any federal tax return that you prepare or file. It is far better to provide the IRS with too much information than too little.

For further information or inquiries about the Employee Retention Credit or any other COVID-related tax law or regulation, please contact Ryan Giggi at in the National Professional Liability/Errors & Omissions Practice Section at Freeman Mathis & Gary, LLP.