The ERC (Employee Retention Credit): Key Updates
Wes Read (CPA, CFP®) explains the Employee Retention Credit (ERC) for dental practice owners: what the ERC was (COVID-era payroll subsidy covering 50% of qualifying wages up to a per-employee cap), how claims were made (payroll providers amended Form 941s and refunds were paid to practices), and the tax consequences (ERC is taxable income that generally requires amending payroll returns and business/personal tax returns). He emphasizes practical issues now that the amendment window for 2020–2021 has largely closed: the IRS advises including previously-unreported ERC receipts on a current-year return (e.g., 2024 if not yet filed) or on the next year, but taxpayers face trade-offs in timing because reporting in a higher-income year can increase tax. He also describes the remedy if a claim is ultimately disallowed: increase wage expense in the year the disallowance becomes final (or amend as available) to recover tax paid.
Questions this video answers
Roughly Q2 2020 through calendar Q4 2021.
Approximately 50% of qualifying wages, with a per-employee cap the speaker recalls as $10,000 per quarter.
Form 941 (quarterly payroll tax return) is amended by payroll providers; business returns referenced include Form 1120S (S corporations), Form 1065 (partnerships), Schedule C for sole proprietors; personal return is Form 1040 (K-1/W-2 flow-through).
Include previously-unreported ERC receipts on a current-year return (the speaker cites including them on the 2024 return if not yet filed, or otherwise on 2025).
When the disallowance is final, increase wage expense in the year of disallowance (or file an amendment where available) to reverse the prior income recognition and recover taxes paid.
Chapters
Foreign.
Welcome, everybody, to another episode of the Dental Boardroom podcast. It's Wes Farid. Subject of the day is the erc, the employee retention credit. As you know, I run a dental CPA and financial planning firm. And as the dental CPA on the dental CPA side, we do a lot of tax returns, and we do about 800 tax returns a year. So we sort of know the drill pretty well. We got a very solid tax team here who knows dental tax, since we work exclusively in dental. Well, one of the subjects that is on the minds of a lot of dentists right now is this thing going way back to the COVID closure era in 2020. And that is this credit called the ERC, the employee retention credit. And it put a lot of money in a lot of dental bank accounts, really in a lot of bank accounts and businesses throughout the country. And it really did help a lot of dentists get through that period of time when for many of you, you had to literally close your office. And since a lot of your costs are fixed, like your rent, for example, or loan payments, you, even though you may have had a temporary abatement on some of those, for a lot of you, you didn't, and you needed some extra cash to get by. And so the ERC was a lifesaver for a lot of people.
And so I would say virtually, I can't think of a single client that didn't apply for the erc. I think everyone applied for it, and I think a lot of people who needed it got it, and I think a lot of people who didn't necessarily need it still got it. It was generalist, granted. We'll just put it that way. By the government. In some ways, it was like the government dropping money from a helicopter. That's the analogy that economists use sometimes when they talk about stimulus, government stimulus in order to help the economy get through or weather a storm or to simply sort of kickstart consumer spending, et cetera. It's one of the strategies basically just drop money, make it very accessible. And in many ways, that's what the ERC was. Now, there was a process to apply for it. And what I want to address in the next roughly 15 to 20 minutes is just a reiteration of what it was, how it was claimed, is it taxable, how are the taxes calculated and the payments made? And how is. Is there an amendment needed, a tax amendment? And what do you do if the amendment window is closed? Well, that right there, that last point, is the reason why the ERC is resurfacing as a point of conversation with a lot of our clients is because the amendment window has closed and a lot of our clients are asking, well, what do we do then to sort of close out the ERC from an accounting and tax standpoint and call that done and buried? I feel like the ERC is never going to go away. It is just one of those sticky things from the government that has been extremely mishandled. Guidance has been late, chronically late. And us CPA firms out here are oftentimes trying to guess in the dark a bit what we should do about this ERC money. Because it was a lot of money for a lot of people, depending on how many quarters you claimed it for. So let me jump in. What was the erc? Just a quick reminder of what the ERC was. The employee retention credit was, was if you had reduction in your income to a certain level, then you could qualify back in. It was starting in Q2, might have been Q3, I think it was Q2, 2020, and it continued through Q4, calendar Q4, 2021. And so you had roughly six or seven quarters there where, depending on the financial need. And by that meaning that if your, your revenue dropped enough, then you were able to essentially have the government kick in and pay for 50% of your labor costs up to a cap per employee, which I believe was 10,000 per quarter. It's been a few years since I ran through all these numbers, to be honest, but pretty sure that's, that's how it was calculated. And so we, at that time at practice cfo, we sort of really, very quickly, overnight created an assembly line, so to speak, to help our clients who requested this to file for the ERC for those quarters. And then it really was later, I think in late 2021 or so, that they extended it into 2021. And it was open for a couple years to be able to claim that credit for 2020 and 2021. And so a lot of clients acclaimed 2020 right away, right in the heat of the COVID moment. And then a lot of dentists claimed later quarters well after the fact and in many cases well after they were back on their feet. But hey, if the government's handing out money, admittedly, it can be hard to turn that down. And if you truly did suffer an economic loss for those quarters, it is a way for the government to step in and say, here's some subsidies to make you whole for some of the economic effect of COVID which much of that was imposed by state and federal governments. On how long certain industries were closed down and whatnot. So that's what it was, and that was how it was calculated. And the way that it was claimed is your payroll provider who files quarterly payroll tax returns. They're called the 941s. And then once a year they do the 940s. But these payroll tax returns, when you file that quarterly return, now for most of you claim that you filed to claim the ERC credit after the quarter was over, in which case the payroll provider had to go back and redo or aka amend that quarter's 941 that payroll tax return. And when they would amend it, they would apply that credit. And when they applied that credit and they submitted that amended 941 tax return to the IRS some period later, in some cases it was, it felt like immediate. And in some cases it took like two years for that claim of ERC money to finally come as a check to the business owner, to the dentist, who would then deposit it in their corporate account and use that extra money for the various operating expenses that they have. But what was chaotic about it was the IRS sort of extending the date at which one could file, giving instructions on how to submit for the amendment. Payroll companies were all scrambling a little bit to get their technology in place to be able to file that amendment the right way and help you determine eligibility of your erc. And then the checks would start coming in, and then the question is, now what do you do? Because when that check comes in, what happens when you go back two years, three years, whatever, to your 2020 or 2021, that period, and you amend the payroll tax return to show that you had less wages. Because what the government allowed you to do, going back to how it was calculated, is you could take what were your normal wages for that quarter, and let's say it was a hundred thousand, and let's say you got a $40,000 credit for that quarter. The wages essentially that you reported to the government therefore were 60,000 100,000 were your actual wages, but you got a reduction of $40,000 for the credit. So your actual wages were $60,000. Well, it's most likely that your 2020 tax return was already filed by the time that you received that money. And there was guidance on how to handle this from the irs, in which case then not only was that Payroll tax return941 I mentioned earlier, but amended, now you have to amend your business tax return. Whether you're a sole prop. S Corp. Partnership, C Corp. Doesn't matter. Most of you are S corporations. If you're a single doctor owner or you're a, what's called a 1065 partnership, if you are more than one doctor and when you reduce or when you change an item on your profit and loss statement, essentially your labor costs which, which are now lower by some amount, you have to redo your business tax return for that for that year, which is different to clarify than your payroll tax return. Your payroll tax return is the 941. If you're an S corporation, you're filing what's called the 1120s tax return. And that 1120s tax return now has to be redone or amended in order to reflect lower wages. Well, what happens if your wages are lowered? What happens to your profit if you have a lower wage expense? Well, if your expenses are less, your profits are going up. Less expense, higher profit. Very simple. If your profits go up, well, guess what? Do you pay more corporate taxes? Not really, because S corporations are not subject to taxes. Some states, like California, they charge a modest 1.5%. But in most states, your S corporation does not pay taxes. It's called a flow through entity, which means it takes the profits from your corporation and it flows it out to the owner on this form called a K1, which if you're a business owner, a dental practice owner, and you're an S corp or a partnership, you know exactly what a K1 is because you get it every year. And that K1 now is reflecting higher profits from your corporation because, because the corporate profits are higher, because your labor expense is lower from the credit. So you have all these amendments going on because you amend the 941, which means now we have to amend the corporate return or the business return. And if you amend the business return, K1 flows out of that to you personally on your, on your 1040 personal tax return. Now that needs to be amended. So you have three amendments. You got the 941, you got the 1120. If you're a partnership, it's the 1065. If you're a sole prop. Then you don't have a business tax return. It just goes straight on your sole proprietor, schedule C on your, on your 1040. But you got your 941, your 1120s and your 1040. All those have to be amended. Well, what happened was a lot of people, for a period of time, the IRS put a moratorium on this. They were just so backed up. They were so confused on how to roll this out, how to have the amounts reported, taxes collected, all that they were just so late on this stuff that a lot of Doctors received the ERC and then filed these amendments years later, say 2023, 2000 or 2024. And so their CPA may have filed it. Now a lot of you said, wait, I don't want to file an amended return, Even though the 941Amendment was submitted by the payroll company. I don't want to amend my corporate or personal return until I receive that ERC money. Because what happens if I go and do the amendment to my corporate and personal return and I pay the taxes? Since now my income is higher, I pay the taxes, but then I never get the ERC money? Well, now I got to go to try to hunt down that refund from the IRS by saying, hey, IRS, you never paid me my ERC, even though we did the 941Amendment, and I want my money back that I paid for the amended return. So we were generally advising clients, but leaving it up to them was don't file the amendments until you actually get the ERC cash. Now here we are in April of 2025. Most of our clients have received the ERC. There's a few lingering out there, and we're reaching out to the IRS and trying to understand why. Honestly, there doesn't seem to be a rhyme or reason sometimes with the irs, but most of you have received the ER See claims by this point. Are you looking to buy or sell a dental practice? If you're a seller, how do you find a strong list of potential buyers? There's no MLS or Zillow for dental practice sales. In such a fragmented market, with transaction costs so high, many dentists selling their practice feel discouraged. That's why I built practice orbit.com practice orbit is modernizing how dental practices are sold. It's an online marketplace platform platform, and it brings together buyers, sellers, and their teams to smoothly navigate a transition. 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Now, one thing I want to clarify is two things. Number one, if you have to pay taxes on the ERC money, which is effectively what you do, you're probably going to ask why? Why should I even claim the ERC if I get the money and I have to pay taxes? Well, because you're only paying taxes on the erc. So if you're federal, and this was only a federal deduction, so if you're federal or as a federal credit, so, so if your federal tax rate is, let's say, 35%, yeah, you're going to pay 35% on the ERC you got. So if you got $100,000 in that scenario, you're going to pay $35,000 to the IRS for recognizing that $100,000 as income, and you're keeping 65,000. So to address this first point, it still made a lot of sense because you kept somewhere probably around 60 to 70%, maybe more, depending on your tax bracket, your marginal tax bracket at the time of recognizing that ERC money, but you're keeping most of it, in other words. So that's why even if it was taxable, it still made sense. Now, another point on this is that a 941 payroll tax amendment, a 941 payroll tax amendment had to be made for every quarter that you are claiming the ERC. So theoretically, let's say you claimed 2020 Q3 and Q4, and then all four quarters of 2021, that's six quarters, which requires six 941amendments, six 941amendments by your payroll provider. Does that mean you have to do six business and personal tax return amendments? No, because 2020 has one business and personal return and 2021 has one business and personal return. So if you filed in that case, you're going to do one amendment for the two quarters of 2020 to your business and personal tax return and one amendment for all four quarters for 2021 ERC. So in that case, you would have got six deposits, six different ERC deposits, assuming you were eligible for all six quarters. But you would have only, and you would have filed six 941amendments, you would have only filed two business amendments, one for each year and two personal 1040 tax return amendments, one for each year.
Okay, so we've covered what is the erc, how is it claimed, is it taxable, and how these amendments are working now. What do you do with where we are today? The amendment window for 2020, 2021, this is closed because usually I have three years from the time of filing the return. So the amendment window is closed and you can no longer file that amendment. Let's say you received ERC money but you never filed the amendment. Or maybe the amendment was filed but it was rejected for whatever reason and the IRS has said it's too late to file amendments. So now you're thinking, okay, I don't know how to do the right thing here and go tell the IRS that I got the ERC money and that I want to pay the taxes on it. So what the IRS has said, since you can't go back and amend for those years 2020 and 2021 now and again, had you been able to or done it before the amendment window was closed, you would have amended those and your tax preparer would have given you a voucher to pay the taxes on the ERC for those two years. But you can't do that now. So what the IRS has said is to simply include the ERC money that you received but never filed in a business and personal tax return. Amendment 4 to include that money in your 2024 tax return if you have not already filed it. If you've extended right now, we're April 10th, so the corporate due date was March 15th. That's already passed. If you already filed it then too late, you would have to include that ERC money in your 2025 corporate income. Or you can go and amend your 2024, which kind of a pain in the butt to do that. So I would say just include it in 2024 if you haven't filed the return yet, or include it in 2025. Either way, I think it's good with the IRS. Now a lot of people don't want to do that and here's why.
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If you had done an amendment in 2020, your tax return probably was a lot lower your income, because your doors were shut for a few months, it was Covid you may have gone from normally doing, let's say a million and a half a year. You may have dropped down to 8 or 900,000. In other words, that was a very low tax year for you. And it's the lower tax year is the better year to have claimed that extra ERC income. Because that extra ERC income therefore is layered on top of your income on your K1 and W2. It's layered on top of that and it's taxed at your marginal tax rate. That would have been lower, most likely in most cases than if you include that money in 2024, which was probably a better year for you than 2020, in which case that ERC money is taxed at your higher rate because there's no separate tax rate for the ERC money. All that's happening is the ERC money is added to your W2 and your K1. It's simply added to all of your other income that eventually lands on your 1040 tax return and the ERC is added to that. And so whatever tax bracket you've sort of made your way into, because the more income you have, you step like stairs, you step into higher tax brackets on that next level of income. Well, if the ERC money is layered on at that highest step that you're on that highest bracket tier, then it's going to be taxed at that tier. So I had a client recently where this was the case and it was going to add about $12,000 to $15,000 by adding it to 2024 instead of having done it through the amended route for 2020 and 2021. So here's what I am informing clients and letting them make the decision. If you missed the amendment window for whatever reason, on whether that's your fault, whether the CPA firm was just too dang busy to get the amendment in on time, whatever the reason is to not. I said you have two options. You can include it in your 2024 or your 2025 income and pay taxes on it. I. Or. And that's what the IRS guidance is right now, or what some people are wanting to do is just wait and see. Hey, Wes, you know what? This has been such a. This has been such a confusing thing, and the IRS has been really messy around this. I'm going to let the IRS come knock on my door if and when they want taxes on that. Now, as a CPA firm and as a cpa, I have to tell you what the IRS says, You make the decision. I don't know what the risks are of not making the payment and saying, okay, I owe the IRS $70,000 for all the ERC money or estimated 70,000, if I included my 200,000, my 100,000, my 400,000, whatever the sum of your ERC deposits were, if you included that in your tax return, let's say that's going to end up. I'm just going to use a rounded number and say that's 50,000. You can write it, you can add that to your income right now. You're going to make your check to the irs, or you're going to see a reduction in your refund, depending where you are with all of your other taxable situation. If you want to wait, I don't know, is the IRS going to send you a letter at some point and say you never paid this? Are they going to say, hey, this is, this is at the level of being fraudulent. You knew this was taxable, and so they're going to slap some really big penalty on it or just some modest late penalty, which is what I suspect it would be. I think it would be some modest late penalty for not having included that. Or perhaps year by year is going to go, and the IRS is never going to have the time or the manpower to follow up on this and eventually some statute of limitations period is met and it's sort of, it's in the wind at this point. Water under the bridge. Nobody's going to do anything about it. I don't know how that's going to pan out at All I know I should, I know I should include it, or I know I should as a cpa, give you that guidance. But I don't know ultimately how the IRS is going to work here. And we all know that, most of us know, at least we CPAs do that. The Trump administration, through Doge, has fired, I believe, about 5,000 IRS employees. I think there's around 100,000. And there may be more cuts, and they were already backed up before that. So will they ever get around to this? I don't know. And I'm not telling you that you should not respond or not pay the taxes. That would be against my, you know, my license requirements as a licensed certified public accountant. So I can't do that. I'm just trying to sort of paint a picture for you on the history of these ERCs where we're at now, and what are sort of the options for you in the future. Now, last, last point here. What can I do? Here's a question. What can I do if my ERC claim was disallowed and I already reduced my wage expense on my income tax return by the amount of the erc? So let's say you filed the ERC Amendment on your 941, the payroll 941. Let's say you did that for 2021.
And then a year or two goes by, your CPA has you do the amendment for that year to your business and personal tax returns, and you go ahead and pay the taxes on that. Thinking, okay, I'll pay the taxes ahead of time. So when I get it, I know it's done. I don't have to pay taxes on it. But you never get it. And you get a letter that says you were disallowed from getting that credit, what do you do? You did the amendment, business and personal, you paid the taxes. And then after all that, you get a letter from the IRS saying that you are disallowed from getting that ERC money. Well, now you're sort of screwed. All right, I'm going to read something here. I wrote if your ERC was disallowed and you had reduced the wage expense on your income tax return for the year the ERC was claimed, you may in the year your claim disallowance is final, meaning you are not contesting the disallowance or you have exhausted your remedies to argue against the disallowance, increase your wage expense on your income tax return by the same amount that it was reduced when you made your claim. Alternatively, you may but are not required to file an amendment. Okay. What this means is if you are disallowed, but you already amended and paid the taxes on it, then go ahead and take the amount that you have of the wages that.
You paid taxes on and you can now add those wages to your 2024 or 2025 tax return. This is the opposite of the ERC calculation where you reduced your wages and got a refund. Now you're going to increase your wages on your tax return, which will reduce your profit today in your 2024 tax return, that will reduce your profit. And then by reducing your profit, it will reduce the taxes that you have to pay. And ideally, you would collect at least as much in refunds by doing that that you already paid the irs. Now, that last scenario is a little bit of an usual scenario, but I wanted to go over that as I have seen it a couple times. All right. I hope that clarified a little bit on where we are with the landscape of the erc. Tune in next time as we continue to cover the business topics of dental practice, ownership.
