The Employee Retention Credit (ERC) under the CARES Act encourages companies to keep employees on their payroll. This credit is not included in the Internal Revenue Bulletin and therefore cannot be used as a legal authority. 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 ERC 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 ERC for any calendar quarter if they don't apply for the credit on their payroll tax return. The ERC refund is not taxable when it is received; however, salaries equal to the ERC amount are subject to expense dismissal rules. An eligible employer can file their own Form 7200, on the prepayment of employer credits due to COVID-19, to apply for early credit. The notice confirmed that tips received by employees are counted as “qualifying salaries” for employers to calculate credit amounts.
At PKF O'Connor Davies, we can help you not only determine eligibility and calculate credit, but also file Form 941-X if needed. The eligible employer must provide a copy of any Form 7200 that they submitted as an advance to the PEO so that the PEO can correctly declare the ERC on form 941. IRC. Section 280C states that “no deduction shall be allowed for the portion of wages or salaries paid or incurred during the tax year that is equal to the sum of the credits determined for the tax year.” If an eligible employer uses a reporting agent to file Form 941, their quarterly federal tax return, then the reporting agent must reflect the ERC on the Form 941 that they file on behalf of the employer. The PEO does not have to complete Schedule R with respect to employers for whom it does not apply for an ERC. While ERC is not considered taxable income, under Section 280C of the IRC, tax credits for employers create a reduction in wages in the amount of the credit. If an eligible employer uses an uncertified PEO to declare and pay its federal payroll taxes, then the PEO will have to declare the ERC on an aggregated Form 941 and separately declare the ERC attributable to employers for whom it submits an added Form 941 in an attached annex R.
However, the ERC-related expense denial is based on Section 280C (which addresses expenses related to certain tax credit refunds). These include the Paycheck Protection Program (PPP), Employer Payroll Tax Deferral (EPTD) and Employee Retention Credit (ERC). Section 2301 (e) of the CARES Act states that rules similar to those in section 280C (a) of the Internal Revenue Code (the Code) will apply for purposes of applying for an ERC. If your company meets all requirements, you can apply for credit as soon as possible to start your reimbursement process.