Tips for Filing Taxes to Claim the Employee Retention Credit

Since little over two years ago, there has been the Employee Retention Credit (ERC). Why is the ERC still a topic of discussion since it has been around for so long? Because if a firm qualifies, there is a HUGE reward. Credits earned in 2020 and 2021 may still be claimed now, giving firms an extra financial boost.

There are a few ways to optimize the debt forgiveness they get through their Payroll Protection Program (PPP) and the ERC. The exciting part is when a company claims the credit (and receives their return!) after determining they are eligible and calculating their ERC.

How can companies apply for the ERC?

On their federal payroll tax returns, qualified employers must record their ERC eligible salaries and receive the corresponding tax credits (Form 941). The only way to claim the ERC right now is an updated payroll tax return since the credit no longer applies after the third quarter of 2021 (Employee Retention Credit to End Earlier Than Expected), and the third quarter payroll tax reports were due at the end of October (Form 941-X).

Before the conclusion of a quarter, employers could no longer seek an advance payment from the IRS by submitting Form 7200 (Advance Payment of Employer Credits owing to COVID-19).

There is plenty of time to submit amended payroll tax returns as they may be filed three years after the initial return filing date. Find out more about ertc credentials here.

Do the ERC’s effects affect my income tax return?

Yes. Employer tax credits (ERCs) are not regarded as taxable income, but under IRC Section 280C, they result in a decrease in pay equal to the credit’s amount. This decrease happens in the year that the wages were paid, therefore even if the refund hasn’t arrived yet, a 2021 credit must be included on the 2021 tax return. Despite being an outlier and allowing the deduction, New York is one of the many states that adhere to federal law.
Taxpayers may need to reflect an ERC on a return and so raise taxable income before they get a payment as a result of IRS processing delays for updated returns. Therefore, it may be helpful for firms to assess ERC eligibility fast.

Can a corporation alter its 2021 income tax return if it makes an ERC claim for the 2020 quarters in 2021?

No, an updated business income tax return or administrative adjustment request (AAR) for partnerships must be made in order to demonstrate the decrease in salaries if the ERC was claimed in 2021 for 2020 quarters (very probable given that many PPP borrowers were not eligible until the end of 2020). The credit will not appear on the 2021 tax return.

Businesses must immediately ascertain if they may qualify for the ERC since the tax filing season for 2021 is quickly approaching. If the company is eligible, they should apply for the credit as soon as possible to start the return procedure.

The payroll tax provider for a firm does not always have to submit a Form 941-X. Even when provided comprehensive information for the update, certain payroll agencies are now taking a long time to write Form 941-X. Unfortunately, this is wasted time for a company that already has IRS return processing delays. We at PKF O'Connor Davies can help with the calculation of the credit and, if required, the submission of Form 941-X in addition to determining eligibility.