With the Employee Retention Credit (ERC), tax credits for employers reduce payment depending on the value of the credit, according to Section 280C of the Internal Revenue Code (IRC). This decline occurs throughout the year in which the profits were paid. The ERC is not a tax; it's a refundable tax credit for the salaries of eligible employees. These FAQs are not included in the Internal Revenue Bulletin and therefore cannot be relied upon as a legal authority.
This means that the information cannot be used to support a legal argument in a court case. An employer that receives a tax credit for qualified wages, including the attributable expenses of the qualified health plan, does not include the credit in gross income for federal income tax purposes. Neither the part of the credit that reduces employment taxes applicable to the employer nor the refundable part of the credit are included in the employer's gross income. The client employer is responsible for avoiding a “double benefit” with respect to the Employee Retention Credit (ERC) and the credit under section 45S of the Internal Revenue Code.
The client employer cannot use the wages that were used to claim the ERC and declared by the third-party payer on behalf of the client employer to request the $45 credit on their income tax return. Any eligible employer can choose not to apply the Employee Retention Credit for any calendar quarter by not requesting the credit on their payroll tax return. The ERC refund is not taxable when it is received; however, salaries equal to the ERC amount are subject to expense dismissal rules. These rules are similar to those that apply with respect to the choice of payroll tax available in section 41(h) of the Code for credit for certain research and development expenses.
In these cases, taxpayers must modify their income tax return for the previous year to take into account any denial of wage deduction. Many taxpayers spent last year reviewing eligibility and submitting reimbursement requests for the Employee Retention Credit (ERC). If an eligible employer uses a Certified Professional Employer Organization (CPEO) or a 3504 agent to declare their federal payroll taxes on an aggregated Form 941, then they will declare the ERC on their aggregated Form 941 and in Annex R, Assignment Program for those who file an Aggregate Form 941, which has already been filed. Even if your company participates in the Paycheck Protection Program (PPP), you may still qualify to receive the ERC.
The only way to apply for any credits you qualify for is to file an amended return using Form 941-X. A payroll reporting agent (RA) can sign Form 7200, Prepayment of Employer Credits Due to COVID-19, for a customer for whom they have authority, using Form 8655, Reporting Agent Authorization, to sign and file their payroll tax return (e). The notice provides examples of companies that qualify as “qualified salaries” and establishes a process for those companies to treat all salaries paid to employees during that quarter as “qualified salaries” for purposes of calculating the ERC. The safe harbor makes it clear that these amounts are still counted as gross revenue for all other tax purposes.
If an eligible employer uses an uncertified PEO to declare and pay their federal payroll taxes, then they must declare the ERC on an aggregated Form 941 and separately declare any ERC attributable to employers for whom they submit an added Form 941 in Annex R. The eligible employer must provide a copy of any Form 7200 they submitted as an advance payment to their PEO so that they can correctly declare any ERC on Form 941. Yes, if a common law employer is eligible to receive an ERC, they are entitled to it regardless of whether they use an outside payer (such as a reporting agent, payroll service provider, PEO, CPEO or agent) to report and pay their federal employment taxes. The customer, employer and third-party payer will each be responsible for any payroll taxes due as a result of any improper request for employee retention credits that are unduly requested in accordance with their liability under Internal Revenue Code and regulations applicable to payroll taxes declared in any payroll tax return filed by third-party payer in which credit was requested. The ERC expense denial uses § 280C, which covers refunds of tax credits and their relationship to expenses.
You don't enter any credit that reduces employment taxes applicable to employer nor do you include refundable part of credit.