The Employee Retention Credit (ERC) refund is not taxable when it is received; however, salaries equal to the ERC amount are subject to expense dismissal rules. This means that a similar denial of deduction would apply under the employee retention credit, resulting in the employer's total deductions being reduced by the amount of the credit. A payroll reporting agent (RA) can sign Form 7200, Prepayment of Employer Credits Due to COVID-19, on behalf of a customer for whom they have the authority, using Form 8655, Reporting Agent Authorization, to sign and file the employment tax return. Eligible employers can also 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.
A taxpayer can file a modified payroll tax return in a later tax year, but they will have to apply the wage expense exemption in the year to which the ERC application relates, and not when the ERC application is filed or when the funds are received. The PEO does not have to complete Schedule R for employers for whom it does not apply for an employee retention credit. Section 2301 (e) of the CARES Act states that rules similar to those in section 280C (a) of the Internal Revenue Code (the Code) will apply for the purpose of applying the employee retention credit. 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.
At the end of the tax year, taxpayers have already paid or incurred the salary that will be used to apply for any applicable ERC and, presumably, have sufficient information to determine the amount of the ERC with reasonable accuracy. 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. This is done so that a taxpayer cannot “pay twice” and receive a wage deduction and a credit for the same wage expense. 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 this form.
An eligible employer can also file their own Form 7200, on prepayment of employer credits due to COVID-19, to apply for early credit. Given current IRS processing times on amended payroll tax returns, taxpayers may have to pay taxes due due to expense deallocation before receiving ERC reimbursement funds.