What is the Employee Retention Credit?

Before diving into the recording process, let's briefly review what the ERC is:

The Employee Retention Credit is a refundable tax credit against certain employment taxes. It was established as part of the CARES Act to encourage businesses to keep employees on payroll during the COVID-19 pandemic. Eligible employers can claim up to $5,000 per employee for 2020 and up to $7,000 per employee per quarter for the first three quarters of 2021[1].

Why Proper Recording of ERC is Important

Accurately recording the ERC in QuickBooks is essential for several reasons:

• Ensures your financial statements reflect the true financial position of your business
• Facilitates proper tax reporting and compliance
• Helps track the credit amount received and utilized
• Provides clear documentation in case of an audit

Now let's look at how to record the ERC in both QuickBooks Online and Desktop versions.

Recording ERC in QuickBooks Online

Step 1: Create an Other Income Account

1. Go to Accounting in the left menu
2. Select Chart of Accounts
3. Click New
4. For Account Type, choose Other Income
5. For Detail Type, select Other Miscellaneous Income
6. Name the account "Employee Retention Credit"
7. Click Save and Close

Step 2: Record the Deposit

1. Go to the Banking menu and select Make Deposits
2. In the "Received From" field, enter "IRS"
3. In the Account field, select the "Employee Retention Credit" account you created
4. Enter the amount of the ERC refund received
5. Add any relevant memo or description
6. Click Save and Close

Step 3: Reconcile with Bank Statement

Once the ERC refund appears on your bank statement:

1. Go to Banking and select Reconcile
2. Choose the appropriate bank account
3. Enter the ending balance from your statement
4. Check off the ERC deposit transaction
5. Complete the reconciliation process

Recording ERC in QuickBooks Desktop

Step 1: Create an Other Income Account

1. Go to Lists in the top menu
2. Select Chart of Accounts
3. Right-click and choose New
4. Select Income as the account type
5. Choose Other Income as the detail type
6. Name the account "Employee Retention Credit"
7. Click Save & Close

Step 2: Record the Deposit

1. Go to Banking in the top menu and select Make Deposits
2. In the "Received From" field, enter "IRS"
3. Select the "Employee Retention Credit" account in the From Account column
4. Enter the amount of the ERC refund
5. Add any relevant memo
6. Click Save & Close

Step 3: Reconcile with Bank Statement

1. Go to Banking and select Reconcile
2. Choose the appropriate bank account
3. Enter the ending balance from your statement
4. Check off the ERC deposit transaction
5. Complete the reconciliation process

Additional Considerations

Handling Retroactive ERC Claims

If you're claiming the ERC retroactively for past quarters:

1. Create a journal entry to record the credit:some text
   • Debit: Accounts Receivable
   • Credit: Employee Retention Credit (income account)
2. When you receive the refund, record the deposit as described above, but apply it to the Accounts Receivable instead of directly to income.

Adjusting Payroll Expenses

The ERC effectively reduces your payroll expenses. To reflect this:

1. Create a journal entry:some text
   • Debit: Employee Retention Credit (income account)
   • Credit: Payroll Expenses

This entry moves the credit amount from income to a reduction of expenses, providing a more accurate picture of your true payroll costs.

Tracking ERC by Quarter

To maintain detailed records, consider creating sub-accounts under the main Employee Retention Credit account for each quarter:

• Employee Retention Credit - Q2 2020
• Employee Retention Credit - Q3 2020
• Employee Retention Credit - Q4 2020
• Employee Retention Credit - Q1 2021
• Employee Retention Credit - Q2 2021
• Employee Retention Credit - Q3 2021

This allows for easier tracking and reporting of ERC amounts by quarter.

Common Mistakes to Avoid

When recording ERC in QuickBooks, be careful to avoid these common pitfalls:

1. Double-counting income: Ensure you're not recording the ERC as income twice - once when accrued and again when received.
2. Incorrect account classification: The ERC should be classified as Other Income, not as a reduction to payroll taxes.
3. Failing to adjust payroll expenses: Remember to reduce your payroll expenses by the amount of the credit for accurate financial reporting.
4. Inconsistent treatment between books and tax returns: Coordinate with your tax preparer to ensure consistent treatment of the ERC in your financial statements and tax filings.
5. Not maintaining supporting documentation: Keep detailed records of your ERC calculations and eligibility in case of an audit.

Reporting ERC in Financial Statements

The ERC should be reported as Other Income on your income statement. However, for management purposes, you may want to show it as a reduction to payroll expenses. This can be accomplished through a memo entry or by using class tracking in QuickBooks.

For your balance sheet, any accrued ERC not yet received should be shown as an asset under Accounts Receivable.

Tax Implications of ERC

It's important to note that while the ERC is not taxable for federal income tax purposes, it does reduce the amount of wages that can be used for other tax credits and deductions. This includes:

• Paycheck Protection Program (PPP) loan forgiveness
• Research and Development (R&D) tax credit
• Work Opportunity Tax Credit (WOTC)

Consult with your tax advisor to understand how the ERC impacts your overall tax situation.

Amending Previous Filings

If you're claiming the ERC retroactively, you'll need to file amended payroll tax returns (Form 941-X) for the relevant quarters. While this process is typically handled outside of QuickBooks, you should ensure your QuickBooks records align with these amended filings.

Final thoughts

Properly recording the Employee Retention Credit in QuickBooks is crucial for maintaining accurate financial records and ensuring compliance with tax regulations. By following the steps outlined in this guide, you can confidently record your ERC refunds, whether you're using QuickBooks Online or Desktop.

Remember to consult with your accountant or tax advisor for guidance specific to your business situation. They can help ensure that your ERC recording aligns with your overall financial strategy and tax planning.

Lastly, stay informed about any updates or changes to ERC regulations. The IRS and other government agencies may release new guidance that could impact how you record and report the credit.

By mastering the process of recording ERC in QuickBooks, you're taking an important step in maintaining the financial health and compliance of your business during these challenging times.