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IRS Regulations Recapture Excess Employment Tax Credits under ARPA


On September 10, 2021, the Treasury Department released temporary regulations related to tax credits under the American Rescue Plan Act’s (ARPA’s) paid sick and family leave and employee retention provisions under the CARES Act. The rules are effective immediately but are applicable to all paid sick and family leave monies credited or refunded on or after April 1, 2021; and employee retention monies credited or refunded on or after July 1, 2021.

The guidance is technical in nature. Employers should carefully review with their accountants and tax specialists to understand the guidance and its impact on their assessed taxes.

An employer may not receive the employee retention credit for the same wages for which the employee receives the paid sick and family leave credit. For second quarter 2021, if an eligible employer receives the employee retention credit based on wages paid that are also qualified leave wages on which the employer may claim the paid sick and family leave credits, the employer must reduce any paid sick and family leave credits by the amount of the credit allowed under the CARES Act. For the third and fourth calendar quarters of 2021, any qualified leave wages eligible employers take into account for purposes of the paid sick and family leave credits may not be taken into account for purposes of the employee retention credit.

The paid sick and family leave credits are also reduced by the amount of the credit allowed under Section 41 (the credit for increasing research activities). In addition, any wages taken into account in determining paid sick and family leave credits cannot be taken into account as wages for purposes of the credits under Sections 45A (Indian Employment Credit), 45P (Employer Wage Credit for employees who are active-duty service members), and 45S (Paid Family and Medical Leave Credit).

Some employers received an advanced payment of the paid sick and family leave credit. Other employers received a refund if the amount of the credits exceeds their taxes for the quarter.

The new guidance provides that any credits claimed that exceeded the amount to which the employer was entitled and that were actually credited or refunded by the IRS are considered to be erroneous refunds. The IRS will collect these erroneous payments in the normal course of processing employment tax returns by treating the amounts as owed taxes (underpayment of taxes).

Recapture of Excess Employment Tax Credits Under the American Relief Plan Act of 2021 »