The Employee Retention Credit (ERC) is a tax credit available to employers to help offset the costs of retaining employees during the COVID-19 pandemic. Although ERC is not considered taxable income, under Section 280C of the Internal Revenue Code (IRC), tax credits for employers create a reduction in wages in the amount of the credit. This means that the information cannot be used to support a legal argument in a court case. 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 ERC 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 ERC for any calendar quarter by not requesting the credit on the employer's payroll tax return. FAQ 85 states that the IRS code does not allow a deduction for wages paid equal to certain credits in a tax year. This requires you to reduce your total deductions by the amount of the ERC 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 the purposes of calculating the ERC. The notice confirmed that tips received by employees are counted as “qualifying salaries” for employers to calculate credit amounts. Before the end of the fiscal year, the user has already provided or witnessed the profits that will be used to apply for any relevant ERC and, consequently, has sufficient information to calculate the amount of the ERC with appropriate precision throughout the Paycheck Protection Program. 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 an eligible employer decides not to apply for the employee retention credit in one calendar quarter, they are not prohibited from requesting it in a later calendar quarter for qualifying wages paid in that next quarter, as long as it meets all requirements. Even if your company participates in the Paycheck Protection Program (PPP), you may qualify to receive the ERC. The taxpayer can file an updated payroll tax return for eligible earnings in a later tax year, but dismissal of wage expenses must be imposed in the year when ERC application is filed, not when payments are received.
Employers cannot deduct salaries used in calculating ERC from taxable income up to amount of ERC. Section 2301 (e) of CARES Act says restrictions similar to those in section 280C of Code apply when applying for ERC. Employers with 100 or more employees could only include wages paid during periods when employees were not working. Companies with 500 or fewer full-time employees can claim wages paid during periods of work and non-work. Understanding all these rules can be mind-boggling.
If you have any questions about how this new ERC guide affects your company, please contact your Plante Moran advisor.