The IRS has released updated guidance that simplifies how employers can correct wage expense deductions related to the employee retention tax credit. As of March 20, new FAQs clarify that taxpayers may now adjust wage expenses in the year an Employee Retention Credit (ERC) claim is either paid or denied—rather than having to amend a prior year’s tax return. This update is based on both the tax benefit rule and the statutory framework of the ERC. This development is particularly beneficial for employers who may have incorrectly deducted wage expenses in a prior tax year under the employee retention tax credit. If an ERC claim was paid or denied in 2024, businesses—especially those working with a paycheck protection program—should review their eligibility for the employee retention tax credit. Your Sarasota CPA should evaluate how those wages were treated and consider making corrections directly on their 2024 income tax return to claim the employee retention tax credit. This simplified approach to ERC wage expense adjustment could help avoid costly amendments and administrative burden.

What Is the Employee Retention Credit?

The Employee Retention Credit is a tax credit that offers a refundable credit against payroll taxes for qualified wages paid during 2020 and 2021. To be eligible, businesses must have experienced a government-mandated suspension or a significant decline in gross receipts. Due to heightened IRS scrutiny, many Sarasota CPA firms and their clients have encountered long delays in the processing of these claims. If you’re still waiting for resolution, it’s a good time to consider professional ERC help from a Sarasota accountant. According to Internal Revenue Service guidance (see Notice 2021-49), wage deductions must be reduced by the amount of the ERC in the year the qualifying wages were paid. However, mismatches in wage deductions can occur. For instance, an employer may have claimed the full wage deduction on a tax return and only later filed for the employee retention tax credit refund. ERC. Alternatively, an employer who anticipated receiving the credit and reduced wage deductions accordingly may end up with understated expenses if the ERC is ultimately denied.

Updated IRS Procedures for Wage Adjustment for the Employee Retention Credit

Under the newly added FAQs (see “Income Tax and ERC,” questions 1 through 3), the IRS is now allowing businesses to avoid filing amended returns or administrative adjustment requests (AARs). Instead, overstated wage deductions can simply be added back as income on the return for the year in which the Employee Retention Credit payment was received. Likewise, if an employer reduced wage expenses in anticipation of an ERC but the claim was denied, they can now increase their wage deductions in the year the denial becomes final. While taxpayers can still choose to amend prior returns or submit an AAR, this new approach is expected to streamline compliance—especially for partnerships and small businesses relying on an accountant in Sarasota or similar local expertise. However, these simplified procedures only apply to ERCs that were paid or denied in 2024. Claims resolved in 2023 or earlier do not appear to qualify under this updated IRS ERC update 2024 guidance.

Professional Insight from Cavanaugh & Co, LLP

If your business had an Employee Retention Credit claim approved or denied in 2024, it’s essential to review how those wages were treated in previous filings. Taking action now may help you avoid the hassle of amending prior returns. At Cavanaugh & Co, LLP, our team of experienced Sarasota CPAs is ready to help you evaluate your wage expense deductions and ensure compliance with the latest IRS guidance. We proudly support businesses across all industries in navigating the complexities of ERC claims, tax return correction, and ongoing compliance planning. If you need help navigating your tax situation, contact us today.