Understanding the Employee Retention Credit: A Comprehensive Guide

The Coronavirus Relief and Economic Security Act (CARES) has introduced a new tax credit for employers, the Employee Retention Credit (ERC). This credit is designed to help employers keep their employees on payroll during the pandemic. But how do you record the employee retention credit?According to the IRS, the amount of this credit must be recorded as a reduction in deductible payroll expenses. This can be done by classifying the ERC item as Gross Payroll Payment in the newspaper transaction.

If a company follows IAS 20, it has the option of declaring the employee retention credit as income or net of qualifying costs. Credit will most likely be reported as income in the other two models. Consequently, a similar denial of deduction would apply under the employee retention credit, so that the employer's total deductions would be reduced by the amount of the credit as a result of this denial rule. 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. Companies must learn how to correctly declare the employee retention credit in a financial statement. In addition, an eligible employer can file a request for reimbursement and make an interest-free adjustment for a previous quarter to claim the employee retention credit to which they were entitled in a previous quarter, following the rules and procedures for making such requests or adjustments. If you received a refund check for the Employee Retention Credit (ERC), register it by creating a bank deposit.

Government program laws and regulations, such as the employee retention credit created by CARES, are complicated and open to interpretation. The employee retention credit is not subject to any particular regulation under Generally Accepted Accounting Principles (GAAP). The PEO does not have to complete Schedule R for employers for whom it does not apply for an employee retention credit. 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. There is limited guidance on how to declare the employee retention credit and other government assistance payments to business owners. Let's take a closer look at how you can record your employee retention credit (ERC) accurately in QuickBooks.

If a third-party payer (CPEO, PEO, or a 3504 agent) applies for the employee retention credit on behalf of their customer's employer, they must collect from their customer all the information necessary to accurately request the employee retention credit on behalf of their customer. If an eligible employer uses a CPEO or an agent 3504 to declare their federal payroll taxes on an aggregated Form 941, then the CPEO agent or 3504 will declare the employee retention credit on their aggregated Form 941 and in Schedule R, Assignment Program for those who file the Aggregate Form 941. It is important to understand how to correctly record your employee retention credit so that you can take advantage of this tax benefit. With careful planning and understanding of all applicable laws and regulations, you can ensure that you are taking full advantage of this tax benefit.