Are Employee Retention Credits Tax Deductible?

The Employee Retention Credit (ERC) is not taxable, but it is subject to cost-relief laws that make it taxable. 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 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 ERC refund is not taxable when it is received; however, salaries equal to the ERC amount are subject to expense dismissal rules. Yes, if a common law employer is eligible to receive the employee retention credit, they are entitled to the credit regardless of whether they use a third-party payer (such as a reporting agent, payroll service provider, PEO, CPEO, or agent) to declare and pay your federal payroll taxes. This is so that a taxpayer cannot “pay twice” and receive a wage deduction and a credit for the same wage expense. In addition, if the eligible employer is a corporation, then a related person is any person who maintains a relationship described above with a person who owns, directly or indirectly, more than 50 percent of the value of the corporation's outstanding shares.

These include the Paycheck Protection Program (PPP), Employer Payroll Tax Deferral (EPTD) and Employee Retention Credit (ERC). In fact, a taxpayer can file a modified payroll tax return in a later tax year, but they will have to apply the dismissal of wage expenses in the year to which the ERC request relates, and not when the ERC request is filed or when the funds are received. When it was originally implemented, employers were not eligible for the ERC if they received a loan from the Check Protection Program (PPP). A payroll reporting agent (RA) can sign Form 7200, Prepayment of Employer Credits Due to COVID-19, for a customer for whom they have authority, using Form 8655, Reporting Agent Authorization, to sign and file the payroll tax return (e). See instructions on Form 941-X, Employer's Adjusted Quarterly Federal Tax Return or Request for Refund. The guide read: “The taxpayer must file an amended federal income tax return or application for administrative adjustment (AAR), if applicable, for the tax year in which qualifying wages were paid or incurred to correct any exaggerated deductions taken with respect to those same wages in the original federal tax return.

Notably absent in Article 51 (i) of Internal Revenue Code (IRC) or in first IRC ERC guidelines was direct prohibition of claiming to ERC for salaries paid to majority owner of corporation or spouse of owner. However, ERC-related expense denial is based on Section 280C which addresses expenses related to certain tax credit refunds. If an eligible employer uses CPEO or 3504 agent to declare their federal payroll taxes on aggregated Form 941, CPEO agent or 3504 will declare employee retention credit on their aggregated Form 941 and in Annex R Assignment Program for those who file Aggregate Form 941 which you have already filed. If an eligible employer uses uncertified PEO to declare and pay its federal payroll taxes, PEO must declare employee retention credit on aggregated Form 941 and separately declare employee retention credit attributable to employers for whom it submits added Form 941 in attached Annex R.If you have any questions about ERC or its impact on you or your company please contact GHJ's tax advisors.

Zachary Kadner
Zachary Kadner

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