The employee retention credit is a fully refundable tax credit for employers, equivalent to 50 percent of qualifying wages (including the attributable qualifying health plan expenses) that eligible employers pay to their employees. This means that the money received from the credit does not need to be included in the employer's 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. It is important for employers to be aware of the potential for a “double benefit” with respect to the employee retention credit and the credit under section 45S of the Internal Revenue Code.
This means that employers cannot use the wages that were used to claim the employee retention credit and declared by the third-party payer on behalf of the 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. If a third-party payer applies for the employee retention credit on behalf of an employer, they must, at the request of the IRS, be able to obtain from the customer and provide the IRS with records that prove their eligibility to receive the employee retention credit. The employer's tax credit will be balanced with quarterly wages in terms of an advance credit or income tax credit. Consequently, a similar denial of deduction would apply under the employee retention credit, so that the employer's total deductions would be reduced by the amount of the credit as a result of this denial rule. It now appears that, according to most recent IRS guidelines, employers should record their employee retention credit on Form 1120-S, line 13g, Annex K and Form 5884. 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 employee retention credit.
If an eligible employer uses an uncertified PEO to declare and pay its federal payroll taxes, then they must declare the employee retention credit on an aggregated Form 941 and separately declare any employee retention credits attributable to employers for whom they submit an added Form 941 in Annex R.The third party payer is not entitled to any employee retention credits with respect to wages that they remit on behalf of an employer (regardless of whether they are considered an employer for purposes of Internal Revenue Code). If an eligible employer decides not to apply for an employee retention credit in one calendar quarter, then they are not prohibited from requesting it in a later calendar quarter for qualifying wages paid in that next quarter as long as they meet all requirements for applying for it. The eligible employer must provide a copy of any Form 7200 that they submitted as an advance to their PEO so that they can correctly declare any employee retention credits on Form 941. The employee retention credit was significantly modified by The Infrastructure and Jobs Investment Act. This means that employers should stay up-to-date with any changes or updates regarding this tax incentive.
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