Understanding the Employee Retention Credit and Other Tax Implications

The COVID-19 pandemic has caused a lot of financial hardship for businesses, and the government has responded with a number of programs to provide financial assistance. One of these programs is the employee retention credit (ERC), which provides eligible employers with credits per employee based on qualified wages and health insurance benefits paid. It is important to understand the rules and regulations surrounding the ERC, as well as other tax implications that may arise from its use. The ERC is a tax credit that is 100% refundable for companies that meet the requirements and can keep employees on the payroll. As a result of the amended and revised Infrastructure Bill, the ERC has been updated and many rules have also been amended.

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. 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, it is important to note that an 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. This means that employers must be careful to avoid a “double benefit” with respect to both credits. You can't apply for the ERC on your annual income tax return.

Since it is no longer available, the only way to apply for any credits you qualify for is to file an amended return using Form 941-X. As with other forms of government assistance provided under the CARES Act, entities should consider the accounting and financial reporting implications of their participation in this program. Because the ERC is not an income-based tax credit, it does not fall within the scope of application of Codification of Accounting Standards (ASC) 740, Income Taxes. If a third-party payer applies for the employee retention credit on behalf of the client employer, they must collect from their customer all information necessary to accurately apply for it. The third party payer is not entitled to receive any part of this credit. The refund is not taxable under article 280C of the Internal Revenue Code (IRC), but it does create a reduction in salary that matches the amount of the credit.

Disaster loan counselors can help businesses with understanding this complex and confusing program. If your company qualifies, you can apply for both FFCRA credits and ERC credits for your retirement plans.In conclusion, it is important to understand all aspects of employee retention credits and other tax implications associated with them. Employers should be aware of all rules and regulations surrounding these credits, as well as any potential double benefits they may receive from them. Additionally, employers should consider all accounting and financial reporting implications before participating in this program.