ERTC and Wage Reductions: What You Need To Know

August 23, 2023
Dayes Law Firm

One of the frequently asked questions about the Employee Reduction Tax Credit is whether the ERTC is related to wage reductions. The Employee Retention Credit/Employee Retention Tax Credit (ERC/ERTC) is a major tax benefit available to eligible employers who retained employees on payroll throughout government-issued COVID-19 restrictions and the ensuing loss of revenue. Learn more about how the ERC works and its relationship with wage reductions. 

Recapping ERC Basics

Your business may qualify for the ERC tax benefit if government mandates limited your operations and you experienced a significant decline in gross receipts during the COVID-19 pandemic. A “significant decline” means a reduction of 50% or more in 2020, or 20% or more in 2021, compared to the same quarter in 2019. 

The Infrastructure Investment and Jobs Act ended the ERC benefit on September 30, 2021, for the majority of businesses, but if your company is a recovery startup business launched after February 15, 2020, the credit extends until the end of 2021.

If you haven’t claimed the ERC, you can do so retroactively by filing an amended return. For more detailed information about the ERC, check out Notice 2021-49 (Guidance on the Employee Retention Credit) by the IRS. 

Does the ERC Reduce Employee Wages?

To answer this common ERTC question, the ERC doesn’t directly reduce employee wages. Rather, this benefit gives financial breathing room to employers who kept employing and paying their workers even while their business suffered the impact of the pandemic. You could claim up to $26,000 for every eligible worker throughout 2020 and 2021. 

Following IRC Section 280C, you must include the 2020 or 2021 tax credit on that year’s tax return and thus increase taxable income, although you haven’t received the refund yet. Technically, the ERC isn’t taxable, but you’ll need to reduce payroll expense deductions according to the ERC amount you claim. 

How Employers Can Use the ERC

One obvious way employers can profit from the ERC is by using the refund to cover payroll expenses, including retirement contributions and health benefits. This benefit can help your business overcome the financial aftermath of the pandemic, retain your employees, and reduce payroll taxes. 

You can claim the ERC along with other benefits, like PPP loan forgiveness. However, if you used forgiven PPP loan amounts to pay employee wages, these wages don’t qualify for the ERC. To claim the ERC, complete Form 941-X (Adjusted Tax Return). You’ll need to include wage reductions and the appropriate ERC amount. The deadlines for claiming the ERC for 2020 and 2021 are April 15, 2024, and April 15, 2025, respectively. 

Avoid ERC Pitfalls

It’s easy to make mistakes while calculating the ERC. Some wages, like majority owner wages, don’t qualify for the credit. The IRS is now investing extra resources into scrutinizing ERC claims, and many businesses experience delays in IRS reviews of amended tax forms.

Because of this, it’s important to work with a skilled tax professional like a competent tax lawyer who can ensure you claim only the tax benefits your business qualifies for and help you lower the odds of a rejected claim or an IRS audit.

Claim Available ERC Benefits With Dayes Law Firm

Calculating the ERC credit correctly can be tricky, even if you study all available ERTC guides. Contact Dayes Law Firm for fast, efficient, and reliable legal help claiming all available tax credits for your Arizona business. Our experienced tax attorneys will ensure your claim covers all eligible benefits and complies with IRS requirements and deadlines.

Call (866) 875-1005 or contact us online for a free consultation with a tax lawyer in Phoenix, AZ.