The employee retention credit is a fully refundable tax credit that eligible employers request to cover certain payroll taxes. It's not a loan and doesn't have to be repaid. For most taxpayers, the refundable credit exceeds the payroll taxes paid in a credit-generating period. 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 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. Any eligible employer can choose not to apply the employee retention credit for any calendar quarter by not requesting the credit on the employer's 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. The IRS has just published a new guide that affects the calculation of the employee retention credit (ERC).
If an eligible employer uses a CPEO or a 3504 agent to declare their federal payroll taxes on an aggregated Form 941, the CPEO agent or 3504 will declare the employee retention credit on their aggregated Form 941 and in Annex R, Assignment Program for those who file the Aggregate Form 941, which you have already filed. The notice confirmed that tips received by employees counted as “qualified salaries” for employers to calculate credit amounts and that employers could request a tip credit from both the ERC and FICA for the same tips. If an eligible employer uses an uncertified PEO to declare and pay its federal payroll taxes, the PEO must declare the employee retention credit on an aggregated Form 941 and separately declare the employee retention credit attributable to employers for whom it submits the added Form 941 in the attached Annex R. If an eligible employer decides not to apply for the employee retention credit in one calendar quarter, the eligible employer is not prohibited from requesting the credit in a later calendar quarter for qualifying wages paid in that next quarter, as long as it meets the requirements to apply for the credit.
If a third-party payer applies for the employee retention credit on behalf of the client employer, the third-party payer can rely on information from the client employer about the client employer's eligibility to apply for the employee retention credit, and the client employer can maintain all records that prove the customer's eligibility to receive the employee retention credit. The PEO does not have to complete Schedule R with respect to employers for whom it does not apply for an employee retention credit. The customer, the employer and the third party payer will each be responsible for the payroll taxes due as a result of any improper request for employee retention credits that are unduly requested in accordance with their liability under the Internal Revenue Code and the regulations applicable to payroll taxes declared in the payroll tax return filed by the third party payer in which the credit was requested. The eligible employer must provide a copy of any Form 7200 that they submitted as an advance to the PEO so that the PEO can correctly declare the employee retention credit on Form 941.
While ERC is not considered taxable income, under Section 280C of the IRC, employer tax credits create a reduction in wages in the amount of the credit. Employers with 500 or fewer employees can apply for the credit based on the salaries of all employees, regardless of whether they worked or not. However, upon request from the IRS, the third party payer must obtain from the customer's employer and provide the IRS with records that confirm the customer's eligibility for the employee retention credit. If an eligible employer uses a reporting agent to file Form 941, the employer's quarterly federal tax return, the reporting agent must reflect the employee retention credit on the Form 941 that you file on behalf of the employer.
The notice confirmed that tips received by employees are counted as “qualifying salaries” for employers to calculate credit amounts. . .
