Impact on the income tax return While the refund is not taxable under IRC § 280C, the amount of the credit creates a reduction in salary that matches the amount of the credit. These FAQs are not included in the Internal Revenue Bulletin and therefore cannot be relied upon as a legal authority. This means that information cannot be used to support a legal argument in a court case. An employer that receives a tax credit for qualified wages, including allocable qualifying health plan expenses, 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 salaries that were used to apply for the employee retention credit and declared by the third-party payer on behalf of the client employer to apply for the 45S 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 it on the employer's payroll tax return.
Schedule your free consultation on the Employee Retention Credit (ERC) to see how much your company qualifies. If the company meets the requirements, it must apply for credit as soon as possible to start the reimbursement process. Worker tips are considered “qualified salaries” to measure and check their credit, whereby companies can request a tip credit from the ERC and another from the FICA for the same tips. The notice provides examples of companies that qualify as “qualified salaries” and establishes a process for those companies to treat all salaries paid to employees during that quarter as “qualified wages” for the purposes of calculating the ERC.
In addition, an eligible employer can file a claim 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. The amount of taxable income that is subject to tax is determined by subtracting allowable deductions from total income. In addition, because the credit is refundable, you may receive a refund in excess of what you originally paid in payroll taxes during the periods for which you qualify. 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.
However, it does reduce the amount of wage or wage expenses that you can claim as a deduction on your income tax return by the amount you were eligible for through the ERC. Please note that refundable credit can only be used for profits that have not been forgiven or that are not likely to be forgiven under the PPP. Given the current IRS processing period for updating payroll and eligible wage tax returns, the taxpayer may have to pay taxes due to the denial of expenses before receiving the ERC refund funds. Keep in mind that since the ERC is a refundable tax credit, you may receive a refund that exceeds your original tax liability.
Employers cannot deduct the salaries used in the ERC assessment from taxable income up to the ERC amount during the calendar quarter. This increases your taxable income by the amount of the credit during the period of time you qualified for the ERC. Since the ERC filing period has passed, you must file an amended return using Form 941-X to apply for any credit for which you may be eligible. Applicants continue to ask questions such as whether ERC funds are taxable and how the entire tax process revolves around the employee retention tax credit.