Reporting an Employee Retention Credit Refund: What You Need to Know

Eligible employers can apply for the Employee Retention Credit (ERC) on their federal payroll tax returns (Form 94). This refund is not taxable when it is received, but salaries equal to the ERC amount are subject to expense relief rules. It's important to understand the implications of the ERC and how it affects you and your company. The common law employer must not include the name or EIN of the third party payer on Form 7200 for the prepayment of the credits requested for wages paid by the common law employer and reported on the employment tax return of the common law employer.

The ERC is recorded as a cash debit or accounts receivable and as a credit to income from contributions or grants, according to the schedule mentioned above. A taxpayer can file a modified payroll tax return in a later tax year, but they will have to apply the wage expense exemption in the year to which the ERC application relates, and not when the ERC application is filed or when the funds are received. If your organization is eligible to receive advance payments from the ERC, any payment received before overcoming eligibility barriers should be considered a refundable advance until the conditions are substantially met (ASU 958-10-65-). Form 941 is used to declare income and social security and Medicare taxes withheld by the employer on employee salaries, as well as the employer's participation in Social Security and Medicare taxes.

Companies with 500 or fewer full-time employees can apply for the ERC for salaries paid during periods of work and non-work. A taxpayer's wage deduction for a tax year must be reduced by the amount of the ERC related to that tax year. When it comes to filing a tax return, how will the ERC refund be treated? Will it be reduced from salary or will it be considered as other tax-exempt income? It's important to note that if your organization files an improper ERC claim, you may have to repay the credit and also pay penalties and interest. Eligible employers will declare their total qualified wages for the purpose of the Employee Retention Credit for each calendar quarter on their federal employment tax returns, usually Form 941, the employer's quarterly federal tax return.

Given the current processing time by the IRS of amended payroll tax returns, taxpayers may have to pay taxes due due to the denial of expenses before receiving their ERC refund funds. We hope that these considerations will help you determine how to account for ERC in your organization and reflect credit in your reports.

Zachary Kadner
Zachary Kadner

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