If I want to claim ERC as an employer, I assume I have to amend 2020 and 2021 to remove the wages from Sch C?

[streampaw]

Am I getting this right? It sounds like I can possibly claim the ERC credit for all the employee wages. So, if an employee made 15k in 2020, and 40k in 2021, I can claim 7.5k ERC in 2020 and 20k in 2021? But then I'd have to remove all those wages from my schedule C deduction, is that correct? 

If I remove those wages from schedule C, my taxes go up by 5k in 2020 and 16k in 2021. 

So, if I amend my tax returns, how soon do I have to owe the additional tax amounts? Can I wait the 20 weeks to receive my ERC before paying those additional taxes on the amended returns? 

Edit: Actually, I remember that my 2021 is on extension, so I don't even have to "amend it" technically. But what happens with my 2020 return? 

[Critter-3]

If your business is a Sch C sole prop then you have no "wages" to remove.   Only W-2 employees you may hire are paid wages reported on the W-2 form issued in January and you as the Sole Prop cannot be paid W-2 wages.  What ever profit is left on the Sch C are your taxable earnings and they are not wages.  The ERC was to help employer's retain employees not to pay yourself as a sole prop.  https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act

[streampaw]

Yes, I have one employee (not myself). 

[Critter-3]

Then you need to read the IRS info on this credit ... it is NOT taken on your personal tax return.  It works thru the payroll system instead.  https://home.treasury.gov/policy-issues/coronavirus/assistance-for-small-businesses/small-business-t...

[streampaw]

From what I'm reading on the IRS website, if you get ERC then you can't deduct those same wages on schedule C (the ones that you used to calculate ERC), since that would be double dipping. So I'm trying to figure out if my math is correct, where I literally don't show those wages on Schedule C.

[Critter-3]

@tagteam  @Hal_Al 

Want to chime in ? 

[Critter-3 · Accepted solution]

Special Issues for Employers: Income and Deduction

85. Does the Employee Retention Credit reduce the expenses that an Eligible Employer could otherwise deduct on its federal income tax return?

Yes. Section 2301(e) of the CARES Act provides that rules similar to section 280C(a) of the Internal Revenue Code (the "Code") shall apply for purposes of applying the Employee Retention Credit. Section 280C(a) of the Code generally disallows a deduction for the portion of wages paid equal to the sum of certain credits determined for the taxable year. Accordingly, a similar deduction disallowance would apply under the Employee Retention Credit, such that an employer's aggregate deductions would be reduced by the amount of the credit as result of this disallowance rule.  

86. Does an Eligible Employer receiving an Employee Retention Credit for qualified wages need to include any portion of the credit in income?

No. An employer receiving a tax credit for qualified wages, including allocable qualified health plan expenses, does not include the credit in gross income for federal income tax purposes. Neither the portion of the credit that reduces the employer's applicable employment taxes, nor the refundable portion of the credit, is included in the employer's gross income.

[tagteam]

I would have to defer to you and @Hal_Al on this one, @Critter-3 .

[streampaw]

So, let me get this straight - am I only reducing the schedule C wages by the amount of the credit itself? Not by the amount of the wages used to calculate the credit?

[Critter-3]

Correct ... your employees did not get less wages because you got the payroll tax credit ... you paid less in payroll taxes because of the credit. 

[streampaw]

But the credit is quite a lot more than payroll taxes. Hmm

[iammeistro]

I know this is an old post. Hoping folks are still paying attention. So for my 2021 Q1 Form 941, I qualified for the full credit on one employee. This amount was comprised of Credits ($5,742) and Tax ($558). Do I reduce my schedule 6 wage expense by the full amount ($6,300) or by just the credit ($5,742)?

[Hal_Al]

@Critter-3  I'm not knowledgeable on this topic.

[tagteam]

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@Hal_Al wrote:

@Critter-3  I'm not knowledgeable on this topic.

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Understood; this is a really old thread.

[Critter-3]

Special Issues for Employers: Income and Deduction

85. Does the Employee Retention Credit reduce the expenses that an Eligible Employer could otherwise deduct on its federal income tax return?

Yes. Section 2301(e) of the CARES Act provides that rules similar to section 280C(a) of the Internal Revenue Code (the "Code") shall apply for purposes of applying the Employee Retention Credit. Section 280C(a) of the Code generally disallows a deduction for the portion of wages paid equal to the sum of certain credits determined for the taxable year. Accordingly, a similar deduction disallowance would apply under the Employee Retention Credit, such that an employer's aggregate deductions would be reduced by the amount of the credit as result of this disallowance rule.  

86. Does an Eligible Employer receiving an Employee Retention Credit for qualified wages need to include any portion of the credit in income?

No. An employer receiving a tax credit for qualified wages, including allocable qualified health plan expenses, does not include the credit in gross income for federal income tax purposes. Neither the portion of the credit that reduces the employer's applicable employment taxes, nor the refundable portion of the credit, is included in the employer's gross income.