Does the Employee Retention Credit Reduce the Expenses that an Eligible Employer could otherwise deduct on its Federal Income Tax Return?

The Employee Retention Credit (ERC) is a valuable tax credit that can provide significant relief to eligible employers who were adversely affected by the COVID-19 pandemic. As employers navigate the claiming process for the ERC, one question that often arises is whether the credit reduces the expenses that an Eligible Employer could otherwise deduct on its federal income tax return.

The short answer is no, the ERC does not reduce the expenses that an Eligible Employer could otherwise deduct on its federal income tax return. The ERC is a tax credit that is calculated based on qualified wages and certain qualified health plan expenses paid by an Eligible Employer. The credit is then applied against the employer’s portion of the Social Security taxes on wages paid to employees.

While the ERC does reduce the amount of employment taxes that an Eligible Employer must deposit, it does not reduce the amount of deductible expenses that the employer may claim on its federal income tax return. The qualified wages and health plan expenses used to calculate the ERC are still considered ordinary and necessary business expenses and can be deducted by the employer on its tax return.

For example, suppose an Eligible Employer paid $10,000 in qualified wages during a calendar quarter and claimed the maximum ERC of $5,000 for that same quarter. The employer’s employment taxes would be reduced by $5,000, but the $10,000 in qualified wages would still be considered a deductible expense on the employer’s federal income tax return.

It’s important to note that the ERC is a relatively new tax credit, and the rules and requirements for claiming it can be complex. As such, it may be helpful for Eligible Employers to consult with a tax professional or advisor to navigate the claiming process and ensure that they are maximizing their relief potential while minimizing audit risk.

In conclusion, the ERC does not reduce the expenses that an Eligible Employer could otherwise deduct on its federal income tax return. Rather, the credit provides relief by reducing the amount of employment taxes that an Eligible Employer must deposit. Eligible Employers should carefully review the eligibility requirements and ensure that they are properly calculating and claiming the credit to maximize their relief potential.