The Internal Revenue Service (IRS) has established certain rules and regulations regarding the employee retention credit (ERTC) that employers must follow in order to receive the credit. This credit is designed to help employers offset the costs of providing wages and health insurance to their employees during the COVID-19 pandemic. The IRS has made it clear that the credit is not taxable income to employers, meaning that employers do not need to include it in their gross income for federal income tax purposes. The ERTC is a refundable credit that companies can request on qualifying salaries, including certain health insurance costs, paid to employees.
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 IRS has barriers in place to prevent wage increases from being factored into the credit once an employer is eligible for the employee retention tax credit. Employers with 100 or fewer full-time employees can use all salaries of employees who work, as well as any paid time they are not working, with the exception of paid vacation provided under the Families First Coronavirus Response Act.
The IRS recognized that treating these amounts as gross income would defeat Congress's clear intention to allow employers to take advantage of the employee retention credit, in addition to other COVID-19 relief measures, subject to certain restrictions to prohibit double counting. 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. Any eligible employer can choose not to apply the employee retention credit for any calendar quarter by not requesting the credit on their payroll tax return. If an eligible employer uses a reporting agent to file Form 941, their quarterly federal tax return, then their reporting agent must reflect the employee retention credit on Form 941 that they file on behalf of their employer.
Section 45B establishes a business tax credit for the amount of an employer's FICA tax liabilities attributable to employee tips that exceed those considered wages for meeting federal minimum wage requirements. The client employer is responsible for avoiding a “double benefit” with respect to the employee retention credit and this section 45S of the Internal Revenue Code. The client employer cannot use wages used to claim the employee retention credit and declared by a third-party payer on behalf of their client employer to request a $45 credit on their income tax return. This law increased the employee limit to 500 to determine what salaries are applicable to the credit. 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 information necessary to accurately apply for this credit on behalf of their customer.
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 this credit was requested. If an eligible employer uses a CPEO or 3504 agent to declare their federal payroll taxes on an aggregated Form 941, then CPEO agent or 3504 will declare employee retention credit on their aggregated Form 941 and in Annex R, Assignment Program for those who file Aggregate Form 941 which they have already filed. 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. The PEO does not have to complete Schedule R with respect to employers for whom it does not apply for an employee retention credit. Any eligible employer can file their own Form 7200, on prepayment of employer credits due to COVID-19, to apply for early credits.