2021 Employee Retention Credit New Guidance from the IRS
Published on by Cheryl Ganim in Tax Services, COVID-19
Taxpayers who claimed the 2021 Employee Retention Credit (ERC) also should have reduced the business wage expenses on their 2021 income tax return by the amount of the ERC credit, resulting in additional taxable income (or reduced net operating losses).
Taxpayers who have not received their ERC refunds have concerns that the time to amend their 2021 tax returns to file a protective claim of refund for the ERC-related income taxes paid (in the event their ERC claim is denied by the IRS) is quickly coming to a close. Other taxpayers claimed the 2021 ERC, did not reduce 2021 wage expenses on their tax return, and received the ERC refunds, thereby claiming a double benefit of the tax deduction and tax credit.
On March 20, 2025, the IRS issued new guidance for taxpayers to correct for the understated or overstated wage expenses on the current year tax return (or in the year the ERC claim is denied), rather than filing a 2021 amended return for a protective claim of refund.
What if the ERC claim is denied and I’ve already reduced the business wage expense and paid income taxes?
In the year the ERC claim disallowance is final (you are not contesting the disallowance, or you have exhausted your remedies to argue against the disallowance), increase the wage expense on your income tax return by the same amount that it was reduced when you made your claim. This has the effect of reducing taxable income in the current year.
Alternatively, you may, but are not required to, file an amended return, AAR, or protective claim for refund to deduct your wage expense for the year in which the ERC was claimed. The business does not need to amend its 2021 income tax return. Instead, the business can address this adjustment on its 2024 income tax return by increasing its wage expense by the amount of the previously reduced wage expense from its 2021 income tax return.
The IRS’s ERC frequently asked questions page has more information.
What if I received the ERC refund but never increased the 2021 wage expense in the amount of the ERC on the 2021 tax return?
Under the new guidance, businesses can include the overstated wage expense amount as gross income on the current year income tax return to correct for the 2021 overstated wage expense deduction. The business does not need to amend its 2021 income tax return.
Instead, the business should account for the overstated deduction by including the ERC disallowed wages that were never adjusted on the 2021 tax return in gross income on its 2024 income tax return. If the taxpayer capitalized wages the taxpayer may need to make other adjustments such as a reduction in basis for capitalized wages.
Have questions?
If you have questions about the ERC and its impact on your tax situation, contact us. Our team of top tax pros is here to help.
