Internal Revenue Service Issues Updated Employee Retention Credit FAQs, Addressing Income Tax Implications of Credit Claims

On March 20, 2025, the Internal Revenue Service (IRS) released updated guidance in the form of Frequently Asked Questions (FAQs) related to the Employee Retention Credit (ERC), clarifying the proper treatment of wage expense deductions on income tax returns in connection with ERC claims. These updates provide important relief and options for taxpayers who either failed to reduce wage expenses when claiming the credit or had ERC claims disallowed after previously reducing such expenses.

The IRS has now confirmed the wage expense adjustment as gross income on income tax returns for the tax year can be included when the ERC is received. An amended 2021 (or 2020) income tax return is no longer required.

The most notable updates appear in the new “Income Tax and ERC” section of the FAQs, where the IRS addresses several scenarios raised by practitioners during the March 20, 2025, National Public Liaison Practitioner Meeting (NPLPM).

Key Highlights

1. Wage Expense Reduction Required When Claiming ERC
   a.The IRS confirmed that taxpayers who claimed the ERC must reduce their wage expense on their income tax returns for the year in which qualified wages were paid or incurred. This reflects longstanding guidance that taxpayers cannot deduct expenses for which they had reasonable expectations of reimbursement, including the ERC.
2. No Need to Amend Prior Returns if ERC Claimed but Wage Expense Not Reduced
   a.Taxpayers who received an ERC payment in a later year but failed to reduce wage expense in the original year do not need to amend their prior returns. Instead, the IRS now allows the inclusion of the overstated wage expense amount as gross income on the income tax return for the year the ERC was received. Example: A business that claimed a $700 ERC for 2021 wages but received the credit in 2024 can report $700 in gross income on its 2024 return rather than amending its 2021 return.
3. ERC Claims Disallowed After Wage Expense Was Reduced
   a.If a taxpayer reduced its wage expense in anticipation of an ERC that was later disallowed, the taxpayer may increase the wage expense on a future tax return (i.e., the year in which the disallowance is finalized) or may choose to amend the original return. Example: A taxpayer reduced its 2021 wage expense based on an expected ERC, but the IRS disallowed the claim in 2024. The taxpayer may restore the expense on its 2024 return or amend the 2021 return to deduct the previously excluded wage expense.

Implications for Taxpayers

These clarifications provide meaningful flexibility for taxpayers navigating ERC-related issues and help avoid the burden of amending closed or soon-to-close tax years. The updates also reduce the risk of inadvertently claiming a double tax benefit—once through the credit and again via an unreduced wage deduction.

Taxpayers are encouraged to review the full FAQs¹ and assess how these changes may affect their filing positions. The IRS has also reiterated that penalty relief may be available for eligible taxpayers under certain circumstances, as described in IR-2022-89.

Ryan continues to assist businesses of all sizes navigate the IRS and their pending ERC claims. Allea Newbold, Principal with Ryan’s Credits and Incentives practice, noted this is welcome guidance given the upcoming statute of limitations deadline for 2021 and past deadline last year for 2020. It also gives companies relief on interest due when amending prior returns.

For additional questions or assistance in determining your next steps, please contact your Ryan tax professional.

1 Frequently asked questions about the Employee Retention Credit | Internal Revenue Service

TECHNICAL INFORMATION CONTACTS:

Allea Newbold
Principal
Ryan
813.371.0566
allea.newbold@ryan.com

Savannah Jermance
Director
Ryan
505.312.4411
savannah.jermance@ryan.com

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.