Does Employee Retention Credit Reduce Wages or Payroll Taxes?

Employers can take advantage of the Employee Retention Credit (ERC) to reduce their payroll taxes and wages. This credit is a fully refundable tax credit for employers, equivalent to 50 percent of qualifying wages (including the attributable qualifying health plan expenses) that eligible employers pay to their employees. It can be used to reimburse employers for the cost of health care provided by them, as well as cash payments. Employers can be reimbursed for the credit by reducing the amount of payroll taxes that they have withheld from employees' salaries and that they must deposit with the Treasury.

The ERC is subject to a deduction exemption, including eligible health plan costs, in the amount of the employee retention credit. Any eligible employer can choose not to apply the ERC for any calendar quarter by not requesting the credit on the employer's payroll tax return. However, employers who apply for the employee retention credit must reduce their employee wage deduction by the amount of the credit received. If a third-party payer (CPEO, PEO, or a 3504 agent) applies for the employee retention credit on behalf of the customer's employer, they must collect from the customer all the information necessary to accurately apply for the employee retention credit on behalf of their customer.

The client employer is responsible for avoiding a “double benefit” with respect to the employee retention credit and the credit under section 45S of the Internal Revenue Code. The client employer cannot use the wages that were used to claim the employee retention credit and declared by the third-party payer on behalf of the client employer to request the $45 credit on their income tax return. The IRS concluded that Section 3121 (q) (which considers tips paid by the employer for the purposes of subsections (a) and (b) of Section 311 results in the employer considering those amounts paid for the purposes of Section 2301 of the CARES Act and Section 3134 of the Code (and presumably the employee retention credit in cases of qualified disaster that is requested on Form 5884-A). Disaster loan counselors can help your business with the complex and confusing employee retention credit (ERC) and employee retention tax credit (ERTC) program. The employee retention credit was significantly modified by the Infrastructure Investment and Employment Act. For more information and examples, see Determining the maximum amount of an eligible employer's employee retention credit.

Schedule your free employee retention credit (ERC) consultation to see how much your company qualifies for. These FAQs are not included in the Internal Revenue Bulletin and therefore cannot be relied upon as a legal authority. This means that this information cannot be used to support a legal argument in a court case.