How Does the ERTC Impact Payroll Tax Reporting for Business?

September 22, 2023
Dayes Law Firm

During the COVID-19 pandemic, many businesses experienced a decline in staff, customers, and financial stability. The government introduced the Employee Retention Tax Credit (ERTC) to help businesses and their employees.

The ERTC went through numerous changes through 2020 and 2021. If you’re not sure how to report payroll tax deposits while filing for the ERTC, you’re not alone, and our team at Dayes Law Firm is here to provide ERTC reporting tips. 

What Is the ERTC? 

The ERTC is a refundable tax credit that rewards businesses for retaining employees through 2020 and 2021. It went into effect through the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020. 

In 2021, the ERTC expanded to include more businesses and account for more of their losses. Qualified businesses can claim credit for wages paid in 2020 and 2021. 

To qualify for the ERTC, your business must have either experienced a significant loss in revenue or suspended activity due to government-mandated shutdowns or guidelines. 

Understanding Payroll Deductions and the ERTC

If you meet the eligibility requirements for the ERTC, you can file for the credit. But first, it’s important to understand how it will change your payroll deductions and payroll tax deposits.

Your ERTC refund is not taxable income, so you don’t need to report it on your income tax return. However, you do need to account for it in your payroll deductions. 

Usually, you subtract your payroll expenses from your gross income, as it qualifies as a tax-deductible expense. However, if you claim the ERTC, you cannot also claim them as a deductible expense. The IRS considers this double-dipping. 

Impact of the ERTC on Payroll Tax Deposits

These ERTC reporting tips are helpful when you’re navigating your payroll tax deposits.

As an employer, you must deposit federal income tax, Medicare tax, and social security tax withheld from employee paychecks on a semi-weekly or monthly basis. You must also report all wages, tips, and compensation you paid employees. 

You can use Form 941 to report your tax deposits. This is the same form you’ll use to file for the ERTC. Eligible employers should do this by calculating the ERTC amount during that pay period and subtracting that number from their payroll deposit. 

To retroactively file for the ERTC, you can amend your existing tax with Form 941-X. If your credit exceeds your tax liability, you may receive the rest as a refund. 

How to Avoid Failure to Deposit Penalties

In 2021, the ERTC was cut short. Initially, the credit was meant to apply to the entire year. 

Instead, the government reallocated funds, making the ERTC available only up to September 2021 for many businesses. Recovery startup businesses are the only businesses that may file for the ERTC past September.

If you already reduced your tax deposits to prepare for the fourth quarter, underpaying would usually result in a Failure to Deposit Penalty from the IRS. However, you can avoid that penalty by paying the difference. The IRS also has a reasonable cause relief option. 

File for the ERTC with Experienced ERTC Recovery Lawyers

If you haven’t taken advantage of the ERTC yet, it’s not too late. The credit applies to wages you paid in 2020 and 2021, you can retroactively file for the credit up to three years after you initially filed your Form 941.

At Dayes Law Firm, we have ERTC reporting tips and have assisted hundreds of businesses in filing for the ERTC. Contact us at 800-503-2000 for a free consultation.