How Can Businesses Ensure Accurate Reporting for the ERTC?

October 19, 2023
Dayes Law Firm

If you’re unsure how to report the ERTC accurately, you’re not alone. With new tax credits comes inevitable confusion. Don’t worry. The team at Dayes Law Firm is here to break down everything you need to know about ERTC reporting. 

What Is the ERTC?

In 2020, COVID-19 led to many businesses struggling financially. The government introduced the Employee Retention Tax Credit (ERTC) through the Coronavirus Aid, Relief, and Economic Security (CARES) Act to prevent more businesses from closing or laying employees off.

The CARES Act initially only provided coronavirus aid relief to businesses that hadn’t already taken Paycheck Protection Program (PPP) loans. However, in 2021, the Consolidated Appropriations Act allowed businesses to claim both types of aid as long as they didn’t double-dip.

Eligibility requirements established by the ERTC involve passing one of two tests. You must prove you either 1) saw a significant decline in gross receipts when comparing your 2020 and 2021 quarters to 2019 or 2) had to shut down your business partially or fully due to a government mandate.

Is the ERTC Taxable Income?

First, understand whether or not the ERTC is taxable income. The short answer is no. 

The longer answer is even though it isn’t taxable income itself, it will impact your payroll deductions. When filing your taxes, you must reduce payroll expense deductions by the wages you claimed under the ERTC. Therefore, your taxable income will increase.

Note that the IRS prohibits any double-dipping of wages you claim under the ERTC with PPP loans and research and development (R&D) funds. 

How to Report the ERTC on Your Tax Return

The type of business you run determines the form you’ll need for ERTC reporting. These types include:

  • S-corporations (S-corps)
  • Partnerships
  • Cooperative estates or trusts

S-corps will use Form 1120-S, specifically line 13g, to report the ERTC. Partnerships, including limited and general partnerships, should use Form 1065 in addition to a Schedule K-1. 

Regardless of your business type, you’ll also have to file Form 5884-A. When preparing these forms, consider all claimed wages for the ERTC and additional tax liability information. 

How to Use Tax Return Forms To Report the ERTC

It’s crucial to report the ERTC on the necessary tax forms accurately. If you’re worried about making a mistake, which is common when dealing with new regulations like tax credits, consult an experienced tax attorney or financial advisor for further guidance. 

Form 1120-S

If you own a corporation, you should use Form 1120-S to report:

  • Gains 
  • Losses
  • Deductibles
  • Credits

Consider all information that contributes to your tax liability. This form is due alongside your other filings as an S-corp on the 15th day of the third month after the tax year ends. 

Form 5884-A

Several types of businesses can file the 5884-A. This form claims the ERTC for employers who were affected by qualified disasters. Specifically, this form is for businesses that continued to pay employees while their business was inoperable. 

Schedule K-1

Finally, you are required to file a Schedule K-1 to report the amount that each partner within your business collected from the ERTC benefits. This detailed form requires information about your business’s income, distributions, tax-exempt income, and nondeductible expenses. 

Ensure Accurate Reporting With Experienced Tax Attorneys

Are you still confused about ERTC reporting? Don’t worry; the tax attorneys at Dayes Law Firm have years of experience with the ERTC. The Dayes Law Firm ERTC team can help you file for the tax credit and show you how to accurately report it to maximize your benefits. Call 866-567-4510 for a free consultation.