Do you have to pay taxes on employee retention credit?

The employee retention credit is a fully refundable tax credit for employers, equivalent to 50 percent of qualifying wages (including the attributable qualifying health plan expenses) that eligible employers pay to their employees. 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.

Schedule your free employee retention credit (ERC) consultation to see how much your company qualifies for. 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. People can get an initial tax deposit using Form 7200, which is to anticipate employer credits. In addition, an eligible employer can file a request 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.

It is offered to employees with requests for loan forgiveness as a result of COVID-19, and could benefit them if they qualify to be a small business. If a third-party payer (CPEO, PEO, or a 3504 agent) applies for the employee retention credit on behalf of the customer's employer, they must collect from the customer all the information necessary to accurately apply for the employee retention credit on behalf of their customer. The employee retention credit was significantly modified by the Infrastructure Investment and Employment Act. Section 280C (a) of the Code generally does not allow a deduction for the portion of the salary paid equal to the sum of certain credits determined for the tax year.

This includes obtaining information regarding the customer's credit requests under section 45S of the Internal Revenue Code and the FFCRA, as well as whether the customer has received a Paycheck Protection Program (PPP) loan authorized under the CARES Act. The Section 199A deduction was introduced in the Tax Reduction and Employment Acts (TCJA) as a compromise for business owners transferred in response to substantial public uproar over the expected drop in the corporate tax rate from 35% to 21%. This prevents a taxpayer from receiving an eligible wage deduction and a wage credit for the same wage cost. However, you cannot apply for both credits with the same earnings for a quarterly payroll tax return for a period covered for qualifying business income, such as the small businesses most affected.

They generally include the pre-tax wages of the employer and the employee, but not any eligible after-tax compensation. If a third-party payer applies for the employee retention credit on behalf of the client employer, they must, at the request of the IRS, be able to obtain from the customer and provide the IRS with records that prove the customer's eligibility to receive the employee retention credit. An eligible employer can file their own Form 7200, on the prepayment of employer credits due to COVID-19, to apply for early credit. The ERC is a misunderstood tax advantage for struggling employers, as owners of small and medium-sized businesses and managers of charities are unaware of it or are incorrect (or, more often, obsolete) in their knowledge.


Denise Lefler
Denise Lefler

Hardcore travel specialist. Extreme bacon lover. Freelance twitter lover. Certified coffee guru. General pizzaaholic. Certified web aficionado.