Are ERC Credits Tax Deductible?

July 6, 2023
Dayes Law Firm

Many business owners who paid qualified wages during the COVID-19 pandemic wonder whether ERC credits are tax deductible. The ERC credit is not a tax deduction but a refundable tax credit. Eligible employers can claim the tax credit to refund a portion of their tax obligation if they employed and paid qualified wages to employees during the height of the pandemic.

What Are ERC Credits?

ERC stands for Employee Retention Credit (also called the Employee Retention Tax Credit, or ERTC). The credit applies to businesses that maintained employees throughout all four quarters of 2020 and the first three quarters of 2021. Employers can receive up to $5,000 per employee in 2020 and up to $7,000 per employee per quarter of the first three quarters of 2021.

To claim your available ERC credits, you must reduce your payroll expense deduction by the amount of the credit you expect to receive. You can retroactively file IRS Form 941-X to claim the deduction and amend your prior tax form. Because eligibility and qualified wages are complex tax concepts, retain a business tax attorney or hire a business tax professional before filing your application.

Who Can Claim an ERC Credit?

Employers who had a full or partial shutdown due to a government order related to the COVID-19 pandemic or experienced a decline in gross receipts in 2020 or 2021 compared to the corresponding quarter in 2019 qualify to claim an ERC or ERTC.

The employer must have paid qualified wages for employees during that period and must file their ERC claim within three years from the original due date for their business tax return. The ERC claim deadlines are as follows:

  • April 15, 2024, for all quarters in 2020
  • April 15, 2025, for all quarters in 2021

Because eligibility isn’t always clear for many businesses, consult with a tax professional or tax attorney before attempting to claim ERC credits for your business.

Qualified Wages for the ERC

Qualified wages include any compensation subject to FICA taxes, including hourly wages, salaries, worker tips, and health benefits. There are also different qualifying wages depending on which quarter you apply for your ERC.

For example, for any quarter of 2020, qualified wages include all wages paid to a full-time W-2 employee for businesses with 100 full-time employees or fewer. However, the threshold increased for 2021, and eligible businesses expanded to allow up to 500 full-time employees for the ERC.

Other rules apply for the final quarter of 2021, as well as for startup businesses that began during the pandemic. You should consult with a business tax professional or business tax attorney to ensure your business is eligible based on paying qualified wages.

What if My Business Closed?

Many business owners had to shutter their restaurants, stores, and other businesses during the pandemic. Can you still qualify for the ERC if your business didn’t survive the pandemic? More than likely, yes. If your business was forced to close temporarily due to a government order or was open for part of the pandemic and paid qualified wages, you can likely claim the ERC for those quarters.

For example, if your business closed in April of 2021, that would include all of 2020 and the first quarter of 2021. You could claim the credit for those quarters.

Contact an Experienced Law Firm for the ERC

For more information about your business’s eligibility for ERC credits, contact the experienced ERC team at Dayes Law Firm. Call us at 800-503-2000 or contact us online to schedule a free, no-obligation consultation with an ERC attorney at our firm in Phoenix, AZ.