IRS Guidance Simplifies Employee Retention Credit Wage Reduction Timing

Recent IRS updates to Employee Retention Credit (ERC) frequently asked questions (FAQ) revise previous guidance regarding which tax year a taxpayer must reduce their wages and make adjustments related to an ERC claim.

The IRS added new questions to their FAQ under Income tax and ERC. These questions address the following situations and remove the need to file amended returns under these circumstances:

Specific situations

I filed an ERC claim but did not reduce the wage expense on my return. I received payment for the ERC claim in a subsequent year. What am I required to do?

If a claim was filed in a past year, but wages were not reduced for that same year then you do not need to file an amended return for that year. Instead, you would include the amount in your gross income for the year you received payment from the IRS.

Ex. ABC Company claimed an ERC of $500 based on $1000 of qualified wages paid for tax year 2021 but didn’t reduce wage expenses on their 2021 return. ABC received $500 in 2024 for the benefit of the ERC, so ABC should include that $500 in gross income on the 2024 income tax return.

I already reduced wage expenses on my income tax return by the expected ERC payment, but my claim was later disallowed. How should I handle?

If your claim was disallowed and you already reduced your wage expense on the applicable year of the ERC claim, you are allowed to increase the wage expense on your income tax return in the year your disallowance is final, for the same amount that it was reduced in the year that you made your claim.

Ex. Business B claimed the ERC for tax year 2021 and reduced its wage expense on its income tax return for 2021 accordingly, because it expected the credit would be allowed and paid. In 2024, the IRS disallowed Business B’s ERC claim. Business B does not challenge the denial of the ERC claim and, accordingly, the disallowance is final. No amendment is required. Business B can make the adjustment on the 2024 income tax return by increasing wage expense by the amount of previously reduced wage expense from 2021.

The option to file an amended return or if applicable, an Administrative Adjustment Request, remains, but the updated FAQs eliminate that requirement in both previous situations.