Employers are eligible for the Employee Retention Credit (ERC) if they have been affected by the COVID-19 pandemic. This credit is a fully refundable tax credit that eligible employers can request to cover certain payroll taxes. It's not a loan and doesn't have to be repaid. The ERC is designed to help employers keep their employees on payroll during the pandemic.
The Internal Revenue Service (IRS) has issued guidance on how to report the ERC on taxes. Employers must reduce wage deductions on their income tax return for the tax year in which they are an eligible employer for the purposes of the ERC. Small employers receive greater benefits under the ERC regime, as they can include wages paid to all employees. Large employers, however, can only include salaries paid to employees for not providing services.
The client employer is responsible for avoiding a “double benefit” with respect to the employee retention credit and the credit under section 45S of the Internal Revenue Code. The client employer cannot use the wages that were used to claim the employee retention credit and declared by the third-party payer on behalf of the client employer to request the $45 credit on their income tax return. Any eligible employer can choose not to apply the employee retention credit for any calendar quarter by not requesting the credit on the employer's payroll tax return. The ERC refund is not taxable when it is received; however, salaries equal to the ERC amount are subject to expense dismissal rules. An employer that receives a tax credit for qualified wages, including the attributable expenses of the qualified health plan, 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. Technically, yes, but you only pay salaries that meet the requirements while the terms of office are in effect and have a more than nominal impact on the company. It is likely that sister holding companies can be treated as separate operations or businesses when considering an eligible employer status, since a fund owned by holding companies is not an active operation or business (rather a passive investment vehicle). While an employer cannot include salaries financed by a PPP loan in the ERC calculation, PPP funds only apply to eight to ten weeks of wage expenses. ERC eligibility periods are longer.
PPP loans can also finance non-wage expenses. No, but, if possible, allocate the maximum allowable non-wage costs to waive PPP. Notably absent in Article 51 (i) of the IRC (or in the first IRC ERC guidelines) was a direct prohibition of claiming to ERC for salaries paid to majority owners of corporations or spouses of owners. From now on, employers must file an amended Form 941X (Quarterly Federal Payroll Tax Return) for quarters in which they were eligible employers in order to apply for ERC. If an eligible employer uses an uncertified PEO to declare and pay its federal payroll taxes, PEO must declare employee retention credit on an aggregated Form 941 and separately declare employee retention credit attributable to employers for whom it submits added Form 941 in attached Annex R.For more information on employee retention credit, visit Cherry Bekaert's ERC Guidance Center or contact Martin Karamon. The entities that belong to Cherry Bekaert brand are independently owned and are not responsible for services provided by any other entity that provides services under Cherry Bekaert brand. Our use of terms “our firm” and “we” and terms of similar meaning denote alternative practice structure of Cherry Bekaert LLP and Cherry Bekaert Advisory LLC.
If an eligible employer uses CPEO or 3504 agent to declare their federal payroll taxes, customer must complete and print form or provide means of completing and printing form but customer will have to sign it. The customer, employer and third party payer will each be responsible for payroll taxes due as result of any improper request for employee retention credits that are unduly requested in accordance with their liability under Internal Revenue Code and regulations applicable to payroll taxes declared in payroll tax return filed by third party payer in which credit was requested. For taxpayers who have already filed their taxes without claiming ERC, they may need to file amended returns if they want to claim it retroactively. It is important to prepare working documents that allocate PPP funds for entire covered period of 24 weeks in order to claim ERC credits correctly. In conclusion, employers should understand how employee retention credits work and how they should be reported on taxes correctly in order to maximize their benefits from this program.