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Table of Contents:
By applying for the ERC (Employee Retention Tax Credit), there’s potential for receiving a healthy refund and enjoying a sizable capital injection into your business.
That said, applying for the ERC can be intimidating. That’s why it’s critical to work with highly-trained professionals (like Innovation Refunds’ team of independent tax professionals), who can guide you along the way.
At IR, we work with a network of independent tax attorneys to help businesses apply for the ERC. One of the top questions our independent team encounters regarding the ERC is exactly how to report the ERC refund on tax returns and how it affects taxable income.
The question they get most often is: “When we get the credit, what do we do with our books?”
While Innovation Refunds does not provide tax or legal advice, keep reading, and we’ll show you what to consider when discussing how to report the ERC with your tax professionals.
What is the ERC?
The ERC is a payroll tax refund that helps eligible businesses receive capital per employee kept on payroll during the pandemic It’s designed to reward eligible businesses that, in part, retained existing employees during 2020 and 2021. To claim the ERC, eligible businesses need to file amended employment tax returns (Forms 941-X) for any applicable quarters.
Does My ERC Affect Income Tax Returns?
One of the top questions our team of independent tax professionals gets is, “How does the ERC affect my tax returns?”
Some quick points to consider:
- The ERC refund is not considered to be taxable income under IRC Section 280C.
- Employers claim the ERC on their federal employment tax returns.
- As a payroll tax credit, it decreases the amount your business can expense for payroll in each qualifying quarter, and may require that you re-file.
- It’s a reduction of your payroll cost – which means expenses go down by the amount of the credit.
Please refer to our FAQ to learn more about eligibility, fees, and other information related to our services.
What are Forms 941 and 941-x?
As mentioned, the ERC requires filing an amended federal income tax return, or perhaps an administrative adjustment request (AAR), as applicable.
A form called the 941-X exists to amend the original filing from 941. This can be used to correct employment taxes that you’ve already filed – including for the 2020 and 2021 years that may be eligible for the ERC.
Continue reading for general guidance on reporting the ERC.
Step #1: Find the original 941 form you filed
To start the process, you’ll need to acquire a copy of your previously filed 941.
How to find yours:
- The IRS offers “Routine Access to IRS Records”.
- If you use QuickBooks, search for the Archived Forms page and pick your 941.
- Or simply ask your CPA or tax preparer.
Step #2: Begin filling out the most recent form 941-x
Quick Steps for filling out Form 941-X:
- Fill out the “company information” on each page.
- Fill out the section, “Return You’re Correcting.”
- Include the date that you discovered you were ERC eligible (your “error”)
- Checkmark “Claim” in the “Adjusted Employment Tax Return” Part 1 section.
- Checkmark “d.” under “Complete the Certifications” Part 2 section.
- Use worksheets to fill out the Non-Refundable Portion (Line 18) and Refundable Portion (Line 26)
- Do the math to make sure of your totals on Line 30 and Line 31
For a general explanation of how to fill out the amendment form, you can check the IRS video.
Step #3: For each quarter amended, use a separate form
Be sure to read the separate instructions before completing your 941-X form.
You will need to use a separate Form 941-X for each quarter that needs corrections.
Step #4: Calculate qualified wages
In Part 3 of the 941-X form, you’ll be asked to total the corrected amounts for a variety of wages, including qualified sick leave wages and more.
The ERC uses wages and/or health plan expenses to calculate the respective benefit. Lines 30 & 31 ask you to total these amounts in regard to the ERC.
(for specific guidance contact an ERC company like Innovation Refunds today.)
Step #5: Determine if your business falls into the recovery startup category
If you started your business on or after Feb. 15, 2020, if your annual gross receipts don’t exceed $1 million for the individual 2020 and 2021 tax years, and if you have one or more W2 employees (not including owner-operators or family members), you may potentially qualify!
In fact, you may be able to claim a greater refund; recovery startups can claim an additional quarter in 2021.
Step #6: Include an explanation for amending
As you amend your tax returns, you’ll need to explain what changes you’re making.
Step #7: Ensure accuracy before submitting
Double check for any errors before you submit. Accuracy is key!
What to know about ERC processing time
Although ERC companies streamline the process of applying to the ERC, there are still IRS delays occurring.
Initially, the ERC processing time was estimated to take 4-6 weeks to process; however, the processing time has been extended to 6-9 months from the original filing date.
