The Employee Retention Credit (ERC) is a refundable tax credit for the salaries of qualifying employees, and is not considered taxable. However, it is subject to cost-exemption laws that make it taxable in certain circumstances. The ERC is not entered as a credit that reduces applicable labor taxes to the employer, nor is the refundable portion of the credit included. Applying for the employee retention credit is straightforward and requires only a few steps to receive the refund.
The ERC was created under the CARES Act to encourage companies to keep their employees on payroll. The notice confirmed that tips received by employees are counted as “qualifying salaries” for employers to calculate credit amounts. Employers cannot deduct the salaries used in calculating the ERC from taxable income up to the amount of the ERC. Calculating the ERC requires using the qualified salaries that the company pays to employees during eligible employer status.
To ensure you receive all credits you're eligible for, it's best to contact a professional familiar with ERC tax returns. Since the ERC is no longer available, you can only apply for credits by filing an amended return using Form 941-X. If they meet the law's criteria, they calculate the ERC based on the same definition of “qualifying wage” used by other eligible employers. Frequently Asked Question 85 states that IRS code does not allow deducting salaries paid equivalent to certain credits in a tax year.
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. Employers that qualify for the ERC are those that have experienced partial or total closures of their businesses due to government orders during the pandemic. However, expenses related to the ERC are denied based on Section 280C (which addresses expenses related to certain tax credit refunds). The ERC expense denial uses § 280C, which covers refunds of tax credits and their relationship to expenses.
These include the PPP (Paycheck Protection Program), the EPTD (Employer Payroll Tax Deferral) and the ERC (Employee Retention Credit). 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 salaries” for calculating the ERC.