HOW TO REPORT ERC ON A TAX RETURN
The employment retention credit is reported on the tax return on different forms depending on the type of business that you run, namely an S-corporation, partnership, cooperative, estate or trust.
If you’re acorporationor, more specifically, an S-corporation (“S-corp”), and you are a shareholder, then you will have to fill out theForm 1120-S.On the Form 1120-S, line 13g is the section used to report the income, gains, losses, deductions and credits that go into calculating a business’s income tax liability.
If you are apartner of a partnership, whether that be a general partnership, limited liability partnership or a limited partnership, you will have to fill out theForm 1065.
Additionally, with each of these forms, you will have to fill out an accompanyingSchedule K-1, which will vary in its informational requirements depending, again, on the type of business that you run.
Finally,if you’re apartnership, S-corporation, cooperative, estate, or trust, you must file theForm 5884-Afor any employee retention credit claims.
(Additional reading:employee retention credit and nonprofits)
How to report ERC on tax return 1120-S
The way to report the employee retention credit is straightforward, but nevertheless crucial to scrutinize and ensure the proper fields are completed. In this section, we will discuss the following forms and their relevant sections:
- Form 1120-S
- Line 13g
- Form 5884-A
- Schedule K-1
1. Form 1120-S
At its core,Form 1120-Sis an income tax return that is filed by S-corporations. This tax return reports all gains, losses, credits, deductibles and other elements of the corporation’s tax liability.
The short definition of an S-corporation is that it is a “type of business entity that has the capacity to pass corporate income, losses, deductions, credits, etc. through to their shareholders for federal tax purposes.”
In other words, the businessdoes not have to deal with the issue of “double taxation” on corporate income–it simply pushes those taxes to the shareholders, placing the onus on them to fill out the requisite forms.
The form itself is due alongside all other S-corp filings, which are submitted by day 15 of the 3rd month after the end of the tax year.
2. Line 13g
Line 13g falls under the category of “Other Credits” when reporting on the Form 1120-S. The following groups encompass the category of what can be entered into Line 13g:
Undistributed capital gains credits
These are credits that have taxes paid on undistributed capital gains by either a regulated investment company or a real estate investment trust.These credits must be included in proportion to the gross income of the shareholders.
Additionally, the capital gain tax that the company or corporation pays is treated by the IRS as being paid for by the individual shareholders. In turn, the shareholders are allowed a corresponding tax credit.
Work opportunity credit
This is a tax credit under federal law that isavailable specifically to employers that hire and employ individuals from certain targeted groupsthat have consistently faced barriers to employment.
Examples of targeted groups have included:
- Qualified veterans
- Ex-felons
- Qualified summer youth employees
- Individuals who receive qualified supplemental nutrition assistance program benefits (SNAP)
- Long-term unemployment recipients
- And others
Social security and Medicare tax credits
Generally, under this category of tax credits, the credit comes from the amount of employer social security and Medicare taxes paid by the employeras a result of tips that the employee receives.
This is usually relevant to food and beverage establishments that hire servers who earn tips from customers.
Backup wIthholdings
Corporations’ withholdings on dividends, interests, and other types of income fall under this category.
Code P / other credits
Lastly, Code P credits encompass a broad range of credits that have not been reported elsewhere on Form 1120-S.
Credits filed under this category require an additional statement identifying the amount and the type of credits.
The employee retention credit falls under the Code P category, as the IRS instructions clearly states “Employee retention credit for employers” as an applicable credit that further requires the filing of the Form 5884.
3. Form 5884-A
Form 5884-Aisused to claim the employee retention credit foremployers affected by qualified disasters.
According to the IRS, several types of businesses may fill out the form 5884 including partnerships, S-corporations, cooperatives, estates, and trusts.
To qualify, you must continue to pay an employee’s wages even if your business is unable to operate due to damage caused by a disaster. An employee can receive a 40% credit on up to $6,000 of qualifying wages. Credits are limited to $2,400 per employee.
4. Schedule K-1
An entity, such as a business partnership or a S-corporation, is required to file aSchedule K-1thatshows the amounts that are passed through to each participant, such as partners or shareholders individually.
Each party prepares its own tax returns based on the information on the K-1, but the form is complex in that it requires information about the business, including:
- Share of items
- Income
- Earnings
- Credits
- International transactions
- Distributions
- Tax-exempt income, and
- Non-deductible expenses
There are different versions of the Schedule K-1 depending on the type of business filing for taxes. For example, the Schedule K-1 for a partnership is reported on the 1065 tax form and includes in pertinent part each partner’s share of income, losses and tax credits.
Next, there are Schedule K-1’s for S-corporations, which require the reporting of each shareholder’s share of income. These Schedule K-1’s are reported with the Form 1120S, discussed above.
Since we have already discussed Form 1120S, which is filed alongside its own Schedule K-1, the following section will delve into greater detail on the reporting techniques used to file the Schedule K-1 form for partnerships, also known as Form 1065.
