The Employee Retention Credit (ERC) is a tax incentive introduced by the IRS to help employers affected by the COVID-19 pandemic. The credit is designed to help employers cover the cost of wages and health benefits for their employees. According to the most recent IRS guidelines, the ERC should be reported on Form 1120-S, line 13g, Annex K and Form 5884. If an eligible employer uses an uncertified Professional Employer Organization (PEO) to declare and pay its federal payroll taxes, the PEO must declare the ERC on an aggregate form 941 and separately report the ERC that can be assigned to employers for whom it submits the aggregate form 941 in an Annex R. The client employer cannot use the salaries that were used to apply for the ERC, and declared by the third payer on behalf of the client employer, to apply for the 45S credit on their income tax return.
If an eligible employer uses a Certified Professional Employer Organization (CPEO) or a 3504 agent to declare their federal payroll taxes on an aggregated Form 941, the CPEO agent or 3504 will declare the ERC on their aggregated Form 941 and in Annex R, Assignment Program for those who file the Aggregate Form 941. The possibility of deferring the deposit and payment of the employer's share of Social Security taxes under section 2302 of the CARES Act applies to all employers, including employers entitled to paid vacation credits and employee retention credits. The title of Form 5884-A is actually employee retention credit for employers affected by qualified disasters. 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 the customer's eligibility to receive the ERC. The notice confirmed that tips received by employees are counted as “qualifying salaries” for employers to calculate credit amounts.
If an eligible employer decides not to apply for the ERC in a calendar quarter, they are not prohibited from requesting the credit in a later calendar quarter for qualifying wages paid in that next quarter, as long as they meet the requirements to apply for the credit. Also reduce the amounts reported in lines 7 and 8 in the non-refundable and refundable parts of the new employee retention credit of the CARES Act, which is requested in the corporation's payroll tax returns. Consequently, a similar denial of deduction would apply under the ERC, so that the employer's total deductions would be reduced by the amount of the credit as a result of this denial rule. Both the client employer and the third-party payer will be responsible for labor taxes due as a result of any improper request for ERCs that are unduly requested in accordance with their liability under the Internal Revenue Code and applicable payroll tax rules stated in the payroll tax return filed by the third party payer in which the credit was requested.
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