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 (ERC) and the credit under section 45S of the Internal Revenue Code.
The client employer cannot use the wages that were used to claim the ERC 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. The eligible employer must provide a copy of any Form 7200 that they submitted as an advance to the Professional Employer Organization (PEO) so that the PEO can correctly declare the Employee Retention Credit on Form 941. For the purposes of the ERC, a tax-exempt organization described in section 501 (c) of the Code that is exempt from tax under section 501 (a) of the Code is considered to be engaged in a “trade or business” with respect to all operations of the organization. However, upon request from the IRS, the third party payer must obtain from the customer's employer and provide the IRS with records that confirm their eligibility for the ERC. Any eligible employer can file their own Form 7200, on prepayment of employer credits due to COVID-19, to apply for early credit.
The notice confirmed that tips received by employees counted as “qualified salaries” for employers to calculate credit amounts and that employers could request a tip credit from both the ERC and Federal Insurance Contributions Act (FICA) for the same tips. For purposes of determining eligibility for the ERC, all employers, including tribal governments and tribal entities, must apply aggregation rules of sections 52 (a) and (b) of the Code and sections 414 (m) and (o) of the Code. If an eligible employer decides not to apply for the ERC in one calendar quarter, they are not prohibited from requesting it in a later calendar quarter for qualifying wages paid in that next quarter, as long as they meet requirements to apply for it. If a third-party payer applies for it on behalf of their client employer, they must, at request of IRS, be able to obtain from customer and provide IRS with records that prove customer's eligibility to receive it. Domestic employers are not considered to operate a trade or business and are therefore not eligible for it with respect to their domestic employees. If an eligible employer uses an uncertified PEO to declare and pay its federal payroll taxes, PEO must declare ERC on an aggregated Form 941 and separately declare it attributable to employers for whom they submit added Form 941 in attached Annex R.
Instead, solely for purposes of ERC, a tribal government is considered to carry out commercial or commercial activities, and all activities carried out by tribal government will be considered part of those commercial or commercial activities.