The employee retention credit is a fully refundable tax credit that eligible employers request to cover certain payroll taxes. It's not a loan and doesn't have to be repaid. For most taxpayers, the refundable credit exceeds the payroll taxes paid in a credit-generating period. These FAQs are not included in the Internal Revenue Bulletin and therefore cannot be relied upon as a legal authority.
This means that the information cannot be used to support a legal argument in a court case. 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. 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 IRS has made it clear that any credit requested reduces payroll expenses that an employer could otherwise deduct on its federal income tax return. This rule is common in the tax code and also applies to other deductions and credits.
The IRS recently clarified its conflicting statements about exactly what salaries are considered “qualifying salaries” eligible for the employee retention credit. Employer eligibility is generally established by one of two criteria, at least one of which must be met during the calendar quarter in which the credit is requested. If the company meets the requirements, it must apply for credit as soon as possible to start the reimbursement process. This includes obtaining information regarding the customer's credit requests under section 45S of the Internal Revenue Code and the FFCRA, as well as whether the customer has received a Paycheck Protection Program (PPP) loan authorized under the CARES Act.
If an eligible employer uses a reporting agent to file Form 941, the employer's quarterly federal tax return, the reporting agent must reflect the employee retention credit on the Form 941 that you file on behalf of the employer. For companies that had an average of more than 100 full-time employees, qualified salaries are the salaries that are paid to an employee for the time the employee is not in service due to the suspension of operations or a significant decrease in gross revenues. These rules are similar to the rules that apply with respect to the choice of the payroll tax available in section 41 (h) of the Code for credit for certain research and development expenses. Companies with 500 or fewer full-time employees can claim wages paid during periods of work and non-work.
The confusion concerned the eligibility of salaries paid to employees of large companies that provide services on a reduced schedule. People can get an initial tax deposit using Form 7200, which is to anticipate employer credits. Employers used to file Form 7200 (prepayment of employer credits due to COVID-19) to request prepayment to the IRS before the end of a quarter, but that option is no longer available. If an employee participates in more than one plan, the expenses allocated to each plan are added up for that employee.
However, if the same restaurant reduces the working hours of kitchen employees from 40 hours a week to 15 hours a week and only pays 15 hours a week, no salary paid to kitchen employees is a qualifying salary. Worker tips are considered “qualified salaries” to measure and check their credit, whereby companies can request a tip credit from both the ERC and FICA for the same tips. Unfortunately, this is a waste of time for a company that is already facing delays in processing IRS returns to get maximum credit on eligible wages. .