New IRS Guidance: Overstated Wage Deduction Due to ERC

Still wondering if you should file an amended income tax return for 2020 and/or 2021, even though you are still waiting to receive your Employee Retention Credit (ERC) refund? Fortunately, the Internal Revenue Service (IRS) has finally provided long-awaited guidance and updated the ERC FAQs on March 20, 2025.

Background on ERC Guidance

As a reminder, the original IRS guidance required employers to file amended income tax returns to reduce the amount of deductible wages by the amount of the ERC claim. During the past several years, there has been uncertainty and confusion for many employers who have yet to receive their ERC refund, and some are skeptical if they ever will. With this uncertainty, employers have been reluctant to file amended income tax returns, which would ultimately increase their tax liability and require them to shell out additional funds. In addition, timely filed 2020 income tax returns had a March/April 2024 (September/October 2024 if extended) statute of limitation expiration date, adding further confusion on what steps to take if the amended return has not yet been filed.

What’s New in the FAQ Updates

For employers who have not addressed their overstated wage expense on their income tax returns, they are no longer required to file an amended return or Administrative Adjustment Request (AAR) for partnerships. Employers should include the wage adjustment amount as additional income to gross receipts for the tax year the ERC refund was received. This will come as a sigh of relief to some employers and tax practitioners who already opted to take this position on the 2023 and 2024 tax returns.

How the Guidance Can Help Employers

The IRS guidance supports employers by helping them make sure they do not receive a double benefit for ERC and a wage deduction for the same wage expenses. Conversely, this provides a remedy for employers who filed an ERC claim and properly filed an amended income tax return, but the ERC claim was later denied, and the refund statute of limitations has expired. These employers can now add the adjustment amount from the previously amended return to the wage deduction on the income tax return for the year the ERC disallowance is final.

To learn more about how updated guidance in the ERC FAQs impact your ERC situation, contact Tomika Bullet today.