These FAQs are not included in the Internal Revenue Bulletin and therefore cannot be relied upon as a legal authority. This means that information cannot be used to support a legal argument in a court case. An employer that receives a tax credit for qualified wages, including allocable qualifying health plan expenses, does not include the credit in 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. As an expert in SEO, I understand that employers must be aware of the potential for a “double benefit” when it comes to employee retention credits.
Employers cannot use salaries that were used to apply for the employee retention credit and declared by a third-party payer on behalf of the employer to apply for the 45S credit on their income tax return. Employers have the option to choose not to apply for the employee retention credit for any calendar quarter if they don't apply for it on their payroll tax return. It is important to note that employers do not enter the credit that reduces employment taxes applicable to them, nor do they include the refundable part of the credit. 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 records that prove their eligibility to receive the employee retention credit. The CARES Act states that rules similar to those in section 280C (a) of the Internal Revenue Code (the Code) will apply for the purpose of applying the employee retention credit. This means that employers who receive a tax credit for eligible wages and health care expenses do not include the credit in their gross income for federal income tax purposes.
However, while the refund is not taxable under Article 280C of the IRC, employers must reduce their employee wage deduction by the amount of credit received. The IRS has concluded that Section 3121 (q) results in employers considering those amounts paid for purposes of Section 2301 of the CARES Act and Section 3134 of the Code (and presumably the employee retention credit in cases of qualified disaster). Employers who apply for this credit must provide a copy of any Form 7200 they submitted as an advance to their PEO so that they can correctly declare it on Form 941. Eligible employers can file their own Form 7200, Prepayment of Employer Credits Due to COVID-19, to apply for early credit. Additionally, Section 45B establishes a business tax credit for FICA tax liabilities attributable to employee tips that exceed those considered wages for meeting federal minimum wage requirements.