The Employee Retention Credit (ERC) is a tax credit available to employers affected by the COVID-19 pandemic. According to the most recent IRS guidelines, the ERC should be reported on Form 1120-S, line 13g, Annex K and Form 5884. Section 2301 (e) of the CARES Act states that rules similar to those in section 280C (a) of the Internal Revenue Code (the Code) will apply for the purpose of applying the ERC. The latest IRS guidance states that the ERC must be declared on Form 1120-S on line 13g (Other Credits), with the code P. 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 declare the ERC attributable to employers for whom it submits the aggregate form 941 in the attached schedule. The notice confirms that tips received by employees are counted as “qualified salaries” for employers to calculate credit amounts and that employers can request a tip credit from both the ERC and FICA for the same tips. An eligible employer can file their own Form 7200, on the prepayment of employer credits due to COVID-19, to apply for early credit.
In addition, an eligible employer can file a request for reimbursement and make an interest-free adjustment for a previous quarter to apply for the ERC to which they were entitled in a previous quarter, following the rules and procedures for making such requests or adjustments. However, upon request from the IRS, the third party payer must obtain from the client's employer and provide the IRS with records that prove the customer's eligibility to receive the ERC. 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. If an eligible employer uses a reporting agent to file Form 941, their quarterly federal tax return, then their reporting agent must reflect the ERC on their behalf. Yes, if a common law employer is eligible to receive the ERC, they are entitled to it regardless of whether they use a third-party payer (such as a reporting agent, payroll service provider, PEO, CPEO, or agent) to declare and pay their federal payroll taxes. An employer that receives a tax credit for qualified wages, including allocable qualifying health plan expenses, does not include this credit in gross income for federal income tax purposes.
If a third-party payer applies for the ERC on behalf of their client employer, they can rely on information from their client employer about their eligibility to apply for it. The client employer is responsible for avoiding a “double benefit” with respect to both credits. The PEO does not have to complete Schedule R with respect to employers for whom it does not apply for an ERC. It is important that employers understand all of these rules and regulations when filing their taxes in order to ensure that they are taking full advantage of all available credits.