Understanding the Employee Retention Credit and Its Impact on Tax Returns

The Employee Retention Credit (ERC) is a fully refundable tax credit under the CARES Act that encourages companies to keep employees on their payroll. Small employers receive greater benefits under the ERC regime, as they can include wages paid to all employees for as long as they are an eligible employer. Large employers, however, can only include salaries paid to employees for not providing services. Technically, yes, but you only pay salaries that meet the requirements while the terms of office are in effect and have a more than nominal impact on the company.

Instead, the employer must reduce wage deductions on their income tax return for the tax year in which they are an eligible employer for the purposes of the ERC. It's not a loan and doesn't have to be repaid. For most taxpayers, the refundable credit exceeds the payroll taxes paid in a credit-generating period. While an employer cannot include salaries financed by a Paycheck Protection Program (PPP) loan in the ERC calculation, PPP funds only apply to eight to ten weeks of wage expenses. ERC eligibility periods are longer.

PPP loans can also finance non-wage expenses. No, but, if possible, allocate the maximum allowable non-wage costs to the waiver of the PPP. It is likely that sister holding companies can be treated as separate operations or businesses when considering the status of an eligible employer, since the Fund owned by the holding companies is not an active operation or business (rather a passive investment vehicle).For readers who have been following the fiscal arcana for the past few months, remember that a similar problem arose in relation to the PPP before the Consolidated Appropriations Act (CAA) annulled the Internal Revenue Service (IRS) and allowed deductions related to the forgiveness of PPP loans. However, the ERC-related expense denial is based on Section 280C (which addresses expenses related to certain tax credit refunds). No part of the ERC reduces the employer's deduction for their participation in Social Security and Medicare taxes. If your company qualifies, you can apply for both the Families First Coronavirus Response Act (FFCRA) credit and ERC credit for your retirement plans.

Worker tips are considered “qualified salaries” to measure and check their credit, whereby companies can request a tip credit from both the ERC and Federal Insurance Contributions Act (FICA) for the same tips. The amount of taxable income that is taxable is determined by subtracting allowable deductions from total income. The taxpayer can file an updated payroll tax return for eligible earnings in a later tax year, but the dismissal of wage expenses must be imposed the year the ERC application is filed, not when payments are received. The taxpayer's share of relevant Social Security and Medicare taxes can still be deducted from federal returns during this reporting period. Disaster loan counselors can help your business with the complex and confusing Employee Retention Credit (ERC) and Employee Retention Tax Credit (ERTC) program. For more information on this program, visit Cherry Bekaert's ERC Guidance Center or contact Martin Karamon.

Zachary Kadner
Zachary Kadner

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