The ERC is not a tax. It is a refundable tax credit for the salaries of qualifying employees. 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. Because the ERC is no longer available, the only way to apply for the credits you qualify for is to file an amended return using Form 941-X. No part of the ERC reduces the employer's deduction for their participation in Social Security and Medicare taxes. You don't enter the credit that reduces employment taxes applicable to the employer, nor do you include the refundable part of the credit.
Refund tax credits can be higher than the payroll taxes paid and higher than what the company can receive in PPP loans. 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. However, the ERC-related expense denial is based on Section 280C (which addresses expenses related to certain tax credit refunds). Employers cannot deduct the salaries that were used in calculating the ERC from taxable income up to the amount of 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 ERC calculation requires using the qualified salaries that the company pays to employees during eligible employer status. Applying for the employee retention credit is easy and requires only a few simple steps to receive the refund. The best way to ensure that you receive all the credits you're eligible for is to contact a professional familiar with ERC tax returns.
If they meet the law's criteria, they calculate the ERC based on the same definition of “qualifying wage” used by other eligible employers. The new guidance states that an employer who deducted salaries, which were also the basis of an ERC request, must adjust their income in the year in which the salary was paid, not in the year in which the law was enacted or the request for reimbursement was filed. These include the PPP (Paycheck Protection Program), the EPTD (Employer Payroll Tax Deferral) and the ERC (Employee Retention Credit). See the instructions on Form 941-X, Employer's Adjusted Quarterly Federal Tax Return, or Request for Refund.