The American Rescue Plan has extended a number of critical tax benefits to small businesses, including the Employee Retention Credit (ERC) and the Paid Leave Credit. The ERC is a fully refundable tax credit for employers that is equivalent to 50 percent of qualified wages (including allocable qualified health plan expenses) that eligible employers pay to their employees. However, the IRS has warned employers to be wary of third parties who advise them to apply for the ERC when they don't meet the requirements. These third parties often charge high upfront fees or a fee that depends on the amount of the refund and may not inform taxpayers that the wage deductions requested in the company's federal income tax return should be reduced by the amount of the credit.
If the company filed an income tax return deducting qualifying wages before filing an employment tax return requesting the credit, the company must file a modified income tax return to correct any exaggerated wage deductions. In addition, during any quarter, employers who meet the requirements cannot request the ERC on salaries declared as payroll costs to obtain the forgiveness of PPP loans or that were used to apply for other tax credits. As a result, the ERC will no longer be available in the fourth quarter, except for recovering start-ups, for salaries paid after September 31. The credit is allowed against employer participation in social security taxes under section 3111 (a) of the Internal Revenue Code (the “Code”) and the portion of taxes imposed on railroad employers under section 3221 (a) of the Railroad Retirement Tax Act (RRTA) that corresponds to social security taxes under section 3111 (a) of the Code. If the amount of the credit exceeds the company's share of its payroll taxes, the excess is reimbursed (paid) directly to the company.
Improperly claiming the ERC could result in taxpayers having to repay the credit along with penalties and interest. The credit is fully refundable because the eligible employer can receive a refund if the amount of the credit exceeds certain federal employment taxes owed by the eligible employer. To ensure that employers are taking advantage of all available benefits, it is important to understand how to apply for and calculate these credits. For more information on how to apply for and calculate these credits, see How to Apply for and Calculate Employee Retention Credit and Determining Which Employers are Eligible to Apply for Employee Retention Credit.
By understanding how these credits work and taking advantage of them when possible, employers can ensure they are getting all available benefits from these programs.