The Employee Retention Credit (ERC) is a refundable tax credit that is not included in gross income. It is subject to expense relief rules, which generally require the reduction of deductible wage expenses by the amount of the ERC received. 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. The third party payer is not entitled to the employee retention credit with respect to the wages that it remits on behalf of the employer (regardless of whether the third party is considered an employer for the purposes of the Internal Revenue Code (the Code)). The ERC expense denial uses § 280C, which covers refunds of tax credits and their relationship to expenses. 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.
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. Any eligible employer can choose not to apply for an employee retention credit for any calendar quarter by not requesting it on their payroll tax return. The third-party payer is not entitled to receive this credit with respect to wages they remit on behalf of an employer. If a third-party payer applies for an employee retention credit on behalf of a client employer, they must be able to provide records that prove their eligibility upon request from IRS. The client employer is responsible for avoiding a “double benefit” with respect to both credits. The client cannot use wages used to claim an employee retention credit and declared by a third-party payer on behalf of them to request a $45 credit on their income tax return.
Refund tax credits can be higher than payroll taxes paid and higher than what can be received in PPP loans. An eligible employer can file their own Form 7200, on prepayment of employer credits due to COVID-19, to apply for early credits. The credit is allowed against employer participation in social security taxes under section 3111 (a) of Internal Revenue Code (the “Code”) and portion of taxes imposed on railroad employers under section 3221 (a) of Railroad Retirement Tax Act (RRTA) that corresponds to social security taxes under section 3111 (a) of Code. For more information and examples, see Determining Which Employers Are Eligible to Apply for Employee Retention Credit and Determining Maximum Amount of Eligible Employer's Employee Retention Credit. An eligible employer can file a request for reimbursement and make an interest-free adjustment for a previous quarter to claim an employee retention credit they were entitled in previous quarter, following rules and procedures for making such requests or adjustments.