On March 20, 2025, the Internal Revenue Service (IRS) updated its Frequently Asked Questions (FAQs) about the Employee Retention Credit (ERC). Under the “Income Tax and ERC” section, the IRS has updated its guidance to provide more flexibility regarding when taxpayers may report the required reductions to wage deductions (in the amount of the ERCs claimed). Specifically, it advised taxpayers to:
- Reduce wage deductions in the amount of the ERC received in the year received (if not reduced from deductible wages on the income tax return in the year the ERC was claimed); and
- Increase wage deductions in the year an ERC is disallowed (if the ERC was reduced from wage deductions in the year it was claimed).
This provides welcome flexibility to taxpayers who are still waiting to receive their 2021 ERC refunds. They will not have to reduce wage deductions on an amended 2021 income tax return and pay income tax on the increase in taxable income while they wait for their refund. Also, taxpayers who received 2020 ERC refunds and failed to reduce their wage deductions on their income tax returns can now make that adjustment on the return for the year the credit was received, where the statute of limitations is still open.
Previous Guidance
While the ERC is not included in an employer’s income, Section 2301(e) of the CARES Act and IRC Section 3134(e) provide that rules similar to IRC Section 280C(a) applied to the ERC. Section 280C(a) operates to disallow a deduction for a portion of wages or salaries paid equal to the sum of certain credits determined for the taxable year.
Notice 2021-49 explained that IRC Section 280C required tracing to the specific wages generating the applicable credit. Due to this tracing requirement, the timing of the reduction in the employer’s deduction occurred in the year the qualified wages generating the ERC were paid. The updates to the FAQ overrule this prior tracing requirement.
Your Guide Forward
With the IRS's recent updates, employers have clear guidance on how to handle wage deductions related to the ERC. Staying informed will be key to navigating these complexities successfully. Reach out to a Cherry Bekaert ERC team member if you have any questions.
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