Understanding the Employee Retention Credit and How to Report It

Eligible employers are responsible for declaring their ERC eligible wages and applying for related tax credits on their federal payroll tax returns (Form 94). 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 (ERC) and the credit under section 45S of the Internal Revenue Code. The client employer cannot use the wages that were used to claim the ERC 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 ERC for any calendar quarter by not requesting the credit on the employer's payroll tax return. The ERC is not a tax; it's a refundable tax credit for the salaries of eligible employees.

Small employers receive greater benefits under the ERC regime. Specifically, for as long as they are an eligible employer, they can include wages paid to all employees. Large employers can only include salaries paid to employees for not providing services. Technically, yes, but you only pay salaries that meet the requirements while the terms of office are in effect and have a more than nominal impact on the company.

Instead, the employer must reduce wage deductions on their income tax return for the tax year in which they are an eligible employer for the purposes of the ERC. The ERC 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. While an employer cannot include salaries financed by a Paycheck Protection Program (PPP) loan in the ERC calculation, PPP funds only apply to eight to ten weeks of wage expenses.

ERC eligibility periods are longer. PPP loans can also finance non-wage expenses. No, but, if possible, allocate the maximum allowable non-wage costs to the waiver of the PPP. It is likely that sister holding companies can be treated as separate operations or businesses when considering an eligible employer status, since the Fund owned by these holding companies is not an active operation or business (rather a passive investment vehicle).The ERC expense denial uses § 280C, which covers refunds of tax credits and their relationship to expenses. The ERC is recorded as a cash debit or accounts receivable and as a credit to income from contributions or grants, according to this schedule.

If an eligible employer uses a CPEO or a 3504 agent to declare their federal payroll taxes on an aggregated Form 941, then they must declare their employee retention credit on this form and in Annex R.If an eligible employer uses a reporting agent to file Form 941, then they must reflect their employee retention credit on this form as well. For more information on how to apply for and receive your employee retention credit, visit Cherry Bekaert's ERC Guidance Center or contact Martin Karamon. ERC credits are calculated based on qualifying wages paid to employees during their status as an eligible employer. Since this program is no longer available, you must file an amended return using Form 941-X if you want to apply for any credits you qualify for. Businesses can still apply for their ERC by filing an amended Form 941X (Quarterly Federal Payroll Tax Return) for any quarters in which they were an eligible employer. The best way to ensure that you receive all of your credits is to contact a professional familiar with ERC tax returns. In regards to how your refund will be treated: it will be considered as another tax-exempt income and should be classified as such when you receive it.

So when you receive your ERC refund, make sure you classify it as other income.