The Employee Retention Credit (ERC) is a tax credit available to employers under the CARES Act, which allows them to defer the deposit and payment of the employer's portion of Social Security tax. According to the most recent IRS guidelines, the ERC should be reported on Form 1120-S, line 13g, Annex K and Form 5884.Eligible employers can file a claim for reimbursement and make an interest-free adjustment for a previous quarter to claim the ERC to which they were entitled in a previous quarter, following the rules and procedures for making such requests or adjustments. If a third-party payer applies for the ERC on behalf of the client employer, they must, at the request of the IRS, be able to obtain from the customer and provide the IRS with records that prove their eligibility to receive the credit. The client employer cannot use the salaries that were used to apply for the ERC and declared by the third-party payer on behalf of the client employer to apply for the 45S credit on their income tax return.
An eligible employer can file their own Form 7200, on the prepayment of employer credits due to COVID-19, to apply for early credit. If an eligible employer uses a reporting agent to file Form 941, their quarterly federal tax return, then the reporting agent must reflect the ERC on that form. The notice also confirmed that tips received by employees are counted as “qualifying salaries” for employers to calculate credit amounts. Any eligible employer can choose not to apply the ERC for any calendar quarter if they don't apply for it on their payroll tax return.
Consequently, a similar denial of deduction would apply under the ERC, so that their total deductions would be reduced by the amount of the credit as a result of this denial rule. The eligible employer must provide a copy of any Form 7200 that they submitted as an advance payment to their PEO so that they can correctly declare the ERC on Form 941.Common law employers are eligible to receive the ERC regardless of whether they use an outside payer (such as a reporting agent, payroll service provider, PEO, CPEO, or agent) to report and pay their federal employment taxes. Now it appears that the latest IRS guidance says that the ERC must be declared on Form 1120-S on line 13g (Other Credits), with code P. An employer that receives a tax credit for qualified wages, including attributable expenses of a qualified health plan, does not include this credit in gross income for federal income tax purposes.