The ERC is not a tax. It's a refundable tax credit for the salaries of qualifying employees. The ERC refund is not taxable when it is received; however, salaries equal to the ERC amount are subject to expense dismissal rules. Refund tax credits can be higher than the payroll taxes paid and higher than what the company can receive in PPP loans.
As mentioned in a previous article, Have Your Cake and Eat It Too, companies can follow some strategies to maximize ERC and Payroll Protection Program (PPP) loan forgiveness. No part of the ERC reduces the employer's deduction for their participation in Social Security and Medicare taxes. Given the current processing time by the IRS of amended payroll tax returns, the taxpayer may have to pay taxes due due to the denial of expenses before receiving the ERC refund funds. Because the ERC is no longer available, the only way to apply for the credits you qualify for is to file an amended return using Form 941-X.
If you have any questions about the ERC or its impact on you or your company, please contact GHJ's tax advisors. Calculating the ERC requires using the qualified salaries that the company pays to employees during eligible employer status. This position was based on pre-existing case law on reimbursement of expenses and on Section 265 of the tax code (which addresses expenses related to tax-exempt income), which were discussed in the guide. Applying for the employee retention credit is easy and requires only a few simple steps to receive the refund.
Even if your company participates in the Paycheck Protection Program (PPP), it may be eligible to receive the ERC. These include the PPP (Paycheck Protection Program), the EPTD (Employer Payroll Tax Deferral) and the ERC (Employee Retention Credit). At the end of the tax year, the taxpayer has already paid or incurred the salary that will be used to apply for any applicable ERC and, presumably, has sufficient information to determine the amount of the ERC with reasonable accuracy. Although ERC is not considered taxable income, under Section 280C of the IRC, tax credits for employers create a reduction in wages in the amount of the credit.
In fact, a taxpayer can file a modified payroll tax return in a later tax year, but they will have to apply the wage expense exemption in the year to which the ERC application relates, and not when the ERC application is filed or when the funds are received. FAQ 86 states that employers who receive a tax credit for eligible wages and health care expenses do not include the credit in their gross income for federal income tax.
