The employee retention credit (ERC) is a fully refundable tax credit that eligible employers can 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. 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, they are not prohibited from requesting it in a later calendar quarter for qualifying wages paid in that next quarter, as long as they meet all requirements to apply for it. If a third-party payer applies for the employee retention credit on behalf of the client employer, they can rely on information from them about their eligibility to apply for it, and they can maintain all records that prove their eligibility to receive it.
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, employer and third party payer will each be responsible for 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 payroll tax return filed by third party payer in which credit was requested. The eligible employer must provide copy of any Form 7200 that they submitted as an advance to PEO so that PEO can correctly declare employee retention credit on Form 941. While ERC is not considered taxable income, under Section 280C of IRC, employer tax credits create reduction in wages in amount of credit. Employers with 500 or fewer employees can apply for it based on salaries of all employees, regardless of whether they worked or not.
However, upon request from IRS, third party payer must obtain from customer's employer and provide IRS with records that confirm customer's eligibility for employee retention credit. If an eligible employer uses reporting agent to file Form 941, their quarterly federal tax return, reporting agent must reflect employee retention credit on Form 941 that they file on behalf of employer. The notice confirmed that tips received by employees are counted as “qualifying salaries” for employers to calculate credit amounts.