How to Record ERC Credit in QuickBooks Desktop and Online?

Are you looking for a way to accurately record employee retention credit in QuickBooks?

The ERC, introduced as part of the CARES Act, offers businesses a refundable tax credit for retaining employees during the COVID-19 pandemic. For some business owners who are struggling to record refunds and credits during the coronavirus crisis, a tax credit like the Employee Retention Credit might be more easily accessible than other popular relief options, like loans and grants.

If you’re not quite sure about how ERC Credit works and how it can be recorded or claimed, this write-up is for you. Below, we’ve discussed some key steps you need to take to ensure that your employee retention credits are recorded accurately in QuickBooks.

What is the Employee Retention Credit (ERC)?

The Employee Retention Credit (ERC) is a refundable tax credit that businesses can claim on qualified wages, including certain health insurance costs, paid to employees. It is usually provided by the CARES Act for eligible employers that experience a significant decline in gross receipts or certain closures related to COVID-19. It is designed to assist small businesses in retaining employees and managing their financial records while complying with IRS regulations.

It serves as a significant financial support for small businesses during challenging times, as it allows eligible entities to claim a tax credit for a percentage of the qualified wages paid to employees. By integrating the ERC into their financial planning, businesses can receive a credit against employment taxes for wages paid to employees during specific periods, contributing to your overall economic growth.

The Credit is computed differently in 2020 and 2021:

• For 2020, the tax credit is equal to 50% of qualified wages that eligible employers pay their employees in a calendar quarter, and qualified employers can receive a maximum credit of $5,000 per Employee.
• For 2021, the tax credit is equal to 70% of qualified wages that eligible employers pay their employees, and qualified employers can earn a maximum credit of $7,000 per Employee per quarter (or $28,000 per Employee for the year).

Benefits of ERC Credits for Employers

Employers eligible for ERC can reduce employment tax deposits, request advance refunds, and claim credits on Form 941 without repayment obligations, unlike PPP loans.

Eligible employers can benefit from the ERC in the following three ways:

• They can reduce the employment tax deposits they are required to make.
• If they had an average of 500 or fewer full-time employees in 2019, they could file a claim for an “advance refund” of the Credit they expect to receive for a specific quarter.
• When they file their quarterly federal employment tax return (Form 941), they can request a refund of any credit not previously taken as an advance refund or by reducing tax deposits.

Like the Paycheck Protection Program (PPP), the ERC is designed to keep employees on the payroll and out of the unemployment office. However, unlike the PPP, the ERC isn’t a loan; recipients will never need to repay or seek forgiveness for ERC funds.

Why is Recording ERC Credit in QuickBooks important?

Recording ERC in QuickBooks is crucial for accurate financial records, IRS compliance, cash flow management, and seamless integration of ERC claims with your business’s overall financial data.

Recording ERC in QuickBooks is necessary for small to large-sized businesses as it allows them to:

Accurate recording of your ERC refund in QuickBooks is vital for maintaining the integrity of your financial records. This practice ensures you comply with IRS regulations, provides transparency in your financial statements, and helps you better manage your company’s cash flow.

Many business owners claim the Employee Retention Credit (ERC) on their federal payroll tax returns, specifically Form 941. The claim depends on when the payroll costs were paid during the quarter. They are allowed to use third-party payroll software like QuickBooks to record the Credit effectively and configure their payroll system to track the refund and Credit in real time.

QuickBooks not only facilitates the calculation and allocation of the ERC but also allows for seamless integration of all your financial data and records, ensuring that businesses can confidently navigate the complexities of ERC regulations, manage the necessary documentation, and streamline the process of claiming and substantiating the credits.

How Does the Employee Retention Credit Work?

The ERC is a valuable tax credit based on payroll taxes your business paid. There are some new laws made but such changes during pandemic but such changes did not change the amount of the Credit itself.

The American Rescue Plan Act stipulated that the nonrefundable pieces of the employee retention tax credit would be claimed against Medicare taxes instead of against Social Security taxes as they were in 2020. However, this change will only apply to wages paid after June 30, 2021, and will not change the total credit amount.

If the Credit exceeds the employer’s total liability for the portion of Social Security or Medicare, depending on whether before June 30, 2021, or after in any calendar quarter, the excess is refunded to the employer. At the end of the quarter, the amounts of these credits will be reconciled on the employer’s Form 941.

Preparing for ERC Refund Recording

Before recording the ERC refund, you are recommended to ensure you have all relevant documentation, which includes:

IRS Form 941: This form is used to report wages paid and employment taxes withheld.

ERC Refund Details: Documentation showing the amount of ERC you are entitled to receive.

Bank Statements: Records of the actual refund received.

Note: Make sure your QuickBooks software is up-to-date to avoid any compatibility issues or missing features that may hinder the recording process.

Steps to Record ERC Credit in QuickBooks!

You can create a deposit to record your ERC Credit. Firstly, you have to create a new account to hold and house this Credit.

Here’s how:

1. Navigate to Accounting.
2. Choose a Chart of Accounts.
3. Press New.
4. After this, select Other Income Account under Account Type.
5. From the Detail Type menu, choose the account type accordingly.
6. Enter the name of your new bank account (like Employee Retention Tax Credit).
7. Press the Save and Close tabs.

How to File for the Employee Retention Credit?

To file for the Employee Retention Credit, ensure eligibility, set up payroll to track the credit, and run payroll using designated pay types. File Form 941 quarterly for refunds.

Below are some things you need to keep in mind before claiming an employee retention credit:

Here’s what:

1. Make sure you qualify for the Credit.
2. Set up your payroll to accept and track the Credit.
3. Employees who fall into one of the following categories won’t make enough money to qualify for the maximum retention credit:

• Full-time employees who make less than $10/hour
• Part-time employees

4. Choose your payroll to get started:

Step 1: Set up your employees with the pay types

1. Navigate to the Payroll menu, then choose Employee.
2. After this, select the Employee you’d like to add paid leave too.
3. Click on the edit icon to add more payment types under the How much do I pay an employee section.
4. In the CARES Act section, select the pay types that apply to you: CARES Act Regular and CARES Act Overtime.
5. If applicable, choose and enter any Employer Paid Health Insurance Premium amount to be tracked on each check.
6. Press the Done button.

Step 2: Run your payroll using the pay types

1. Click on Run Payroll from the Overview screen.
2. Now, select the schedule you are paying for if you have multiple pay schedules.
3. Enter hours in the corresponding fields:

• For regular hours in the Employee Retention Credit Regular.
• For any overtime hours in the Employee Retention Credit Overtime.
• If applicable, type the Employer Health Insurance Premium.
• If your Employee is salaried, choose the salary amount shown to reduce the hours by the number of hours you are paying your Employee with the Employee Retention pay items.
• If your Employee is commission only, you need to convert their pay to an hourly rate.

4. Write down any other items you need to include.
5. Select Preview Payroll.
6. Review the paychecks, and then hit the Submit Payroll icon.

Here’s How it works:

• Just in case you deposit federal employment taxes weekly or semi-weekly, you can reduce the tax deposits by the credit amount that applies to the qualified wages for that pay period.
• If your credit amount is greater than your total employment tax deposits for the pay period, and you are under the 500 employees in 2019 threshold, you can get an advance refund of the Credit using Form 7200. You can file this form multiple times throughout the quarter.
• When you file Form 941 quarterly, you can check your credit amount against the tax deposits already made during the quarter. If there is still Credit left, it will be refunded once you file this form. 

Remember: You can file for this Credit quarterly, so check back here to estimate your credit amount for the next calendar quarter.

Reporting ERC in QuickBooks

As much as documentation is important, QuickBooks reports are too. Reporting helps to track ERC refunds clearly and concisely. They provide transparency regarding the utilization of the refund amount. Also, a detailed ERC report helps an organization stay prepared for the audit process, especially for an event like a financial audit.

Here are some of the best measures to report ERC in QuickBooks:

Generating ERC Reports in QuickBooks: The reports include information related to ERC, such as credits claimed, qualified wages paid to employees, and any other remaining balances.

Customizing Reports to Track ERC Utilization: You can customize various options in ERC reports as per your requirements.

Integrating ERC Reporting with Other Financial Reports in QuickBooks: The integration between QuickBooks ERC reports and other financial modules within the software, such as balance sheets, income statements, and payroll reports, is quite helpful. This integration allows businesses to analyze various processes better and make informed decisions.

Conclusion

Recording the ERC Credit in QuickBooks is a very straightforward process in which you need to ensure that your ERC refund is accurately reflected in your financial records. Whether you use cash basis or accrual basis accounting, maintaining accurate records is crucial for IRS compliance, transparency, and financial management.

You can easily record the Credit as a journal entry and track the amount of Credit claimed after creating a liability account in QuickBooks. Accurate tax codes and categories in QuickBooks allow you to track and report ERC-related information during tax filings and financial audits, thereby promoting seamless tax compliance and financial record accuracy.