What is ERC?
Employee Retention Credit or ERC is a tax deduction, available to U.S. employees in the form of a tax credit against the Social Security payroll tax. The Credit was first introduced in 1992, in the “Tax Reform Act Of 1992”. The ERC is in the form of a deduction, payable in the first year of employment, with further payments in the remaining years of employment. The ERC generally reduces payroll tax liability by the portion of income that is attributable to qualified expenses. (Retirement, child care, family leave, tuition, medical and dental expenses, and most common miscellaneous expenses are examples.)
Generally, your taxable income (based on adjusted gross income or AGI) is reduced by 33.33%, and the credit amount is divided by the number of taxable income months in the year to arrive at the ERC amount. (See Revenue Ruling 99-54 for a detailed explanation of the computation).
- If your ERC amount is less than the amount of your payroll tax liability, then you may be able to reduce the taxable amount of your income by the amount of the credit. The credit amount is refundable and is in effect in all years that you have total income of $1,000 or more, or $1,250 or more if filing jointly. In most cases, the ERC is not refundable.
- If your ERC amount is greater than your payroll tax liability, then you may be able to reduce the tax you pay by the full amount of the credit. You must itemize to claim the credit, and you can use a reduced adjusted gross income (AGI) calculation. The income level of a $1,000 ERC credit in 2017 is slightly over $50,000. Therefore, for a single person in that income range, their taxable income is reduced by $4,000.
The first three years of ERC use are considered “banked”, in that the payment portion of the credit does not require payment until the end of the employee’s year of employment. The deduction amounts are adjusted annually for inflation. For example, in 2025, you would pay approximately $33.33 of ERC and have $3,375 for the federal government, or $3,400 if you are filing jointly. Therefore, the IRS expects the ERC to grow significantly each year. An employee’s ERC can be lost if he or she leaves a job for a different employer, or if he or she is discharged, with termination payment.
If an employee’s termination payment is greater than the ERC, then the ERC must be repaid. (See Revenue Ruling 99-54.) Note that the ERC is reduced by an employee’s AGI each year the employee is employed. This is different from Social Security. When a Social Security employee works more than 30 weeks, Social Security deducts a portion of the employee’s Social Security income from the employee’s income. If the employee is not on Social Security payroll, the ERC is not reduced or refundable.
How To Use The ERC?
To qualify for an ERC, you must meet the following requirements:
- You must have worked at least 330 days in the last 12 months. (If the ERC uses “last 12 months” instead of “current 12 months”, the payment will be lower or even zero. In this case, you must exhaust all of your credits before applying for Social Security benefits.)
- You must be an employee of a qualifying employer (that is, not an individual, household, partnership, S corporation, or trust), which is a trade or business that is not a household.
- Your qualified business must be owned by you or your spouse, or your spouse must be the “head of household.”
- You must file a Schedule C (Form 1040) for all of your business income.
- You must have a “qualified business income” (QBI) in excess of $157,500 if you are a single individual or $315,000 if you are married filing jointly.
- You must have an additional qualified business in excess of $150,000 if you are a single individual or $300,000 if you are married filing jointly.
- The qualifying business income is “qualified business income,” or QBI, that you receive from your trade or business. This income is from 1) net business sales or exchanges of your principal assets, or 2) net capital gains from the sale of a portion of your principal assets. It includes business income from an S corporation, but not from a partnership. Qualified business income from an S corporation must include all of the business’s net income from its S corporation related activities. Qualified business income from an S corporation must also include a portion of the S corporation’s depreciation, and you cannot use depreciation in determining the QBI from a S corporation.
FAQs About ERC
What is the formula for determining my ERC?
Your ERC is determined by the sum of 25% of your eligible wages, or W-2 wages, plus 2.5% of your qualified business income. W-2 wages are “total wages” paid by your employer that are “required” to be paid under the Social Security Act. That means they are wages you earned by being employed, and not total hours worked.
Qualified business income is business income from your trade or business (more on that below). It is income earned from your qualified trade or business, and must be from “qualifying” transactions. It does not include investment income, interest income, dividends or capital gains. The amount of your QBI from a qualified trade or business does not include personal exemptions.
As a general rule, if your personal exemptions are more than $4,050 (for singles) or $9,050 (for married filing jointly) in 2017, your QBI for the year will be over that amount. For example, if you have personal exemptions of $6,050, and your QBI is $18,850, your QBI for the year will be over $20,900. You can use the “threshold” method to determine your ERC (earlier versions of the ERC used that method). If your taxable income for the year is less than the total of your qualified business income and your personal exemptions, you are entitled to an ERC.
I don’t earn any wages. How do I get ERC?
If you are not currently working or otherwise qualified to work, the IRS will notify you by mail. In some cases, a notice will come in the mail within 30 days. If you don’t reply within 30 days, the IRS will send a notice under penalty of perjury that you are not eligible to work. After that, you’ll receive a letter. You’ll also have 30 days after you receive the letter to request a hearing before the IRS. If you don’t request a hearing, you will receive a final determination letter. You can also apply for the Written Declaration (Form W-4) if you are a couple with at least one qualifying child and earned less than $250,000.
You need the ERC form to request a hearing before the IRS. You should have received a determination letter by the beginning of February 2023. However, the IRS will likely issue you a determination letter after the IRS becomes aware of the status of your filing status and has a chance to check your return. If you are not receiving a letter, it is possible that the IRS is using your ERC form to determine your ERC. If that’s the case, you can request a new ERC form.
I’m missing two items from my 2017 return. Can I file an amended return?
Yes, you may file an amended return. If you can prove that you know you did not file a return on time, you may file an amended return. You don’t need to attach it to a return you already filed, as long as it is a correct application and that the IRS considers the matter resolved. An amended return must be filed within three years of the original return. An amended return is allowed even if you filed a regular tax return on the same day you filed for an amended return. A self-check for timely filings from the IRS will provide the proof you need. If you have an issue with your filing status, consider filing Form 433 if your filing status is 65 or older and you made more than $3,000 in 2017.
I want to file an amended return. Can I do so after my payment is due?
An amended return may be filed after your tax payment is due. You will need to have a reasonable amount of time to make a payment or the IRS will assume that you paid your taxes in full and you can’t file an amended return. To file an amended return after your tax payment is due, you must pay at least three days before the due date. After the deadline, you may still file an amended return. If you fail to pay your taxes on time, the IRS may deduct your penalty for late payment. The IRS will also levy interest and possibly criminal charges if you do not pay.
I have questions about the right amount to deduct under Section 199A. Can I get more information from the IRS?
You can get IRS Publication 970, the quick reference guide to income taxes. This publication is available online. The IRS requires tax filers to report all of their sources of qualified business income on Schedule C of their federal tax return. For tax year 2018, for example, you report all of your qualified business income on Schedule C and your business deductions in Schedule A. However, Schedule C doesn’t include all the deductions that apply to qualifying business income. If you want to understand more about the SBA qualification rules, you should see the Guide to Subchapter S Corporations from the IRS. While the IRS has not updated the SBA regulations in the past few years, the guide is still useful. The appendix to that guide provides the specific forms and schedules that are used by the SBA.
Why ERC Form 8332, the Form W-4 form, is more complicated than the W-2 form. Can the W-2 be used to determine if your worker can claim the 199A deduction?
Yes. If you are married and both of you work for the same employer, you both need to fill out the W-2 form to determine your tax withholding for the year. If one of you works for a private employer and the other works for a governmental employer, they both need to fill out a W-2. If you want to use the W-2, you will need to manually adjust the W-2 to reflect the qualified business income. Most tax preparers also do this for their clients. If your tax preparer isn’t familiar with this process, they can usually assist you in doing this.
Why ERC Form 6251 and W-2 forms aren’t used to calculate qualified business income?
You can use ERC Form 6251 and W-2 forms to determine whether you are a sole proprietor, an S-Corp or a LLC. However, the IRS uses the ERC Form 6251 to determine whether your qualified business income is subject to self-employment tax. The Form W-2 has certain limitations.
What is the difference between a Form 1099-MISC and a Form 1099-K?
The difference between a 1099-MISC and a 1099-K is whether you must include your tax return with your wages. The IRS provides various tables to help you determine whether you need to include a tax return with your wages. The numbers on the Form 1099-MISC are the gross income amount for the prior-year period. The numbers on the Form 1099-K are the net income amount. If you make $75,000 in taxable income, you would need to report $55,000 as taxable income. If you make $100,000 in taxable income, you would need to report $85,000 as taxable income.
Do I have to file Form 1099?
You must file Form 1099 if you receive any income in the previous year. If you receive wages, dividends, royalties, rents, and government payments, you must include them on your Form 1099. However, if you receive only capital gains, if you receive dividends from a corporation or partnership, or if you receive rental income from a trust, you do not need to include the income on Form 1099.
Does the Section 199A deduction affect a corporation?
Yes. As a result of the Section 199A tax code, a partnership or a corporation must separately file a schedule C for their qualified business income. The Partnership, as a general rule, must separately report and pay qualified business income. The Section 199A deduction doesn’t affect a corporation unless the corporation is not a pass-through entity. The company has to separately report and pay qualified business income. The Form 1099-K is usually the most widely used in determining whether the company must separately report and pay qualified business income. The Form 1099-K can also be used to report and pay qualified business income from other sources (excluding dividends).
What ERC Program Schedule 1 forms are needed to report and pay the 199A deduction?
The ERC Form 1s are required to be filed with the Social Security Administration (SSA). Schedule 1 is filed with SSA and the IRS. ERC Form 1 is filed in the standard format as required by the IRS. You should consult your tax preparer to learn how to properly fill out this form. ERC Form 2 is the supplemental schedule to ERC Form 1. The ERC Form 2 is required to report all qualified business income. You can also use the Form 6251, as discussed above, to determine whether a qualified business income is subject to self-employment tax. You must fill out a Schedule K-1 if the business you are serving has 10 or fewer employees. Schedule K-1 has additional requirements and is not necessary to report qualified business income for individual taxpayers or for partnerships or corporations.
Does the Section 199A deduction depend on my failure to file a tax return?
No. You are not required to file a tax return if you do not receive any tax refunds or credits. If you do file a tax return, the IRS would assess and pay your tax, but the amount of tax that you owe would be equal to your tax liability. The IRS has no way of knowing whether or not you had tax-deferred earnings. You must determine whether you have tax-deferred earnings in previous tax years. If you do not receive a refund, there is no tax you are required to pay on them at this time. This means that your tax-deferred earnings are not subject to the new rate. Instead, they are treated as normal income. In the past, most tax-deferred earnings were treated as long-term capital gains, which are taxed at a higher rate.
Can I qualify for a Section 199A deduction if I sell stock or investment in another qualified business?
The Section 199A deduction is limited to qualified business income. A qualified business is defined as an entity that is organized and has less than 20 employees, and any foreign corporation if the stock of the foreign corporation is issued in the United States. These requirements apply whether you trade in a stock or open a bank account with your broker. A resident individual taxpayer who has qualified small business income but does not own or manage a business is not eligible for the deduction. However, a resident individual taxpayer who sells stock or invests in another qualified business can take a Section 199A deduction.
What about a non-qualified business that sells or gives stock to customers or employees of a qualified business?
The Section 199A deduction is not available to the individual who sells or gives stock to customers or employees of a qualified business. If you are a non-qualified taxpayer and sell or give stock to customers or employees of a qualified business, you must report the sale or investment on Schedule 1 and include the amount of qualified business income on Schedule K-1.
Does the section 199A deduction apply to the sale or donation of appreciated stock?
No. The sale or donation of appreciated stock is generally not included in gross income. The sale or donation of appreciated stock is treated as a distribution for income tax purposes. However, in a case where the taxpayer is a qualified partnership, the excess gain on the sale of an asset that the qualified partnership sells and gives to a non-qualified partner or member (as determined under section 1.1-3) is includible in gross income.
Is ERC s the same as Section 529s?
No. The ERC treatment is different from the Section 529 treatment. An ERC is an investment contract designed to help make 529 education tax-deductible to qualified expenses. If you are uncertain if your educational expenses qualify for the ERC deduction, check with your educational institution to determine the ERC qualification rules for the school you are enrolled in. If the school determines that your qualified expenses are not the appropriate kind of expenses for the ERC tax benefit, they can grant you a refund of the tax benefits.