How does the Employee Retention Credit Affect My Tax Return?

Is the ERC taxable income?

While the Employee Retention Credit is not taxable income (see Internal Revenue Code § 280C), you will need to account for the credit on your quarterly 941, the Employer’s Quarterly Federal Tax Return. The credit is accounted for as a reduction in wages. If you receive an ERC credit of $56,000, then you would decrease the amount of reported wages by $56,000. 

The ERC is a refundable tax credit, which means it can reduce your taxes below zero. If you have fewer tax liabilities than the amount of credit received, then the IRS will send a check for the difference.  For example, if you have $30,000 in total tax liability and receive an ERC of $50,000, then the IRS will send you a check for $20,000.

The ERC also has an impact on how other credits and deductions are calculated. For instance, if you receive an ERC of $50,000 and have a total taxable income of $100,000 before applying the credit to your tax return, then your taxable income would be reduced to $50,000. This means that any credits and deductions related to taxable income would be calculated on the new total of $50,000.

The ERC is an important tax credit for businesses struggling during the COVID-19 crisis. It can provide a substantial amount of relief by reducing how much taxable income is reported and how much in taxes businesses pay. It is important to understand how the ERC affects your tax return so that you can maximize the benefits it provides.

You can read more at the IRS website or reach out to American Financial Tax and speak to one of our friendly specialists. We have developed software to streamline the ERC application and filing process.

How do you claim ERC on your taxes?

You cannot claim the credits on your annual income tax returns. If you want to claim any credits, you need to file an amended return using form 941-X and claim the credit retroactively. This can be done within 3 years of the original filing of form 941.  You will need to provide the IRS with details of how and when you qualified for the credit.

Once your amended tax return has been approved, it may lead to a decrease in the taxes you owe for that particular year and you will be eligible for a refund on the difference between what you paid minus the amount of the credit.

American Financial Tax can help you with this process, so don’t hesitate to reach out. We have the tools and expertise to help you navigate how ERC affects your tax return easily and efficiently. Contact us today for more information.

Is the ERC a refund or a credit?

The Employee Retention Credit is not a refund. It is a refundable tax credit designed for businesses that continue to pay their employees during the COVID-19 crisis or have significant decreases in revenue from March 13, 2020 until December 31, 2021.

Taxpayers eligible for this credit include employers who paid wages to employees during the COVID 19 crisis and/or had a decrease in revenue from March 13th to December 31st, 2021. The credit becomes refundable if the eligible credit exceeds the amount of taxes paid. Click here to determine your eligibility for the Employee Retention Credit.

Eligibility dates for recovery startup businesses

While the eligibility for most businesses ends with wages paid before October 1, 2021, there is good news if you were a recovery startup business. In the case of recovery startups, you can claim ERC for wages paid after September 30, 2021 and before January 1, 2022. For more information, businesses should refer to section 3134 of the Internal Revenue Code which was enacted by the American Rescue Plan and subsequently added to by the Infrastructure Investment and Jobs Act in 2021.

In addition, recovery startups may use all qualified wages for the Employee Retention Credit no matter how many employees they had. Eligibility is determined quarter-by-quarter so if your business suffered a decline in gross sales or suspended operations (fully or partially) in one quarter, then that would meet the eligibility criteria; you would not be eligible for the recovery startup inclusion. However, you may still be able to use the recovery startup eligibility criteria for another quarter. See IRS notice 2021-49 for further clarification.

We can help you understand how the ERC affects your tax return. American Financial Tax has experience in this area and has developed software to make filing easy and efficient.  Contact us today for more information or to get started on your application process. We look forward to helping you maximize the benefits of the Employee Retention Credit!

How long do I need to keep records related to ERC?

Records related to wages you claimed for the Employee Retention Credit should be kept for a minimum of six years and submitted to the IRS upon request. In the event of an audit, you must be able to provide evidence that you were eligible for the credit, how much was claimed, and how much was paid.


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