The Employee Retention Credit (ERC) has been a valuable resource for eligible employers who have kept their employees during the COVID-19 pandemic. However, questions still arise regarding the tax implications.
Does the employee retention credit reduce the expenses that an eligible employer could otherwise deduct on its federal income tax return?
Does an eligible employer receiving an employee retention credit for qualified wages need to include any portion of the credit in income?
It is worth noting that the credit dollars are not considered federal taxable income, but any interest paid by the IRS with the credits is taxable income. To avoid double dipping, the credit amount needs to reduce the wage deduction. The IRS views ERC as the company receiving back the wages it paid to employees, so they cannot also deduct those wages.
Reducing Wage Deduction in the Year of ERC Receipt
The IRS prefers that the ERC be removed from the year it came from, requiring an amended tax return. However, in practice, many companies claim payroll tax credits differently, and auditors often permit reducing the wage deduction in the year received. A 2019 article shows the IRS sending instructions to auditors regarding the proper year for claiming the Work Opportunity Credit, which is a similar payroll tax credit to permit reducing the wage deduction in the year received. This is a good precedent for similar payroll tax credits, including the ERC.