Do You Have to Amend Tax Return for ERC Credit?

The Employee Retention Credit (ERC) was a government stimulus program designed to help businesses retain employees during the COVID-19 pandemic. While a refundable payroll tax credit, receiving the ERC impacts a business’s income tax liability. Businesses often need to adjust previously filed income tax returns to account for the credit, ensuring compliance and accurately reflecting their financial position.

Understanding the Income Tax Impact of ERC

The Employee Retention Credit directly impacts a business’s income tax because qualified wages used for the credit cannot also be deducted as an expense. This means the wage deduction on a business’s income tax return must be reduced by the ERC amount. This adjustment prevents a “double benefit,” where a business receives a credit for wages and also deducts those same wages, lowering taxable income twice.

This wage expense reduction applies to the tax year when qualified wages were paid, even if ERC funds were received later. For example, if a business paid qualified wages in 2020 and claimed the ERC, the 2020 income tax return’s wage deduction should be reduced by the ERC amount, regardless of when the credit was received. This adjustment affects the business’s gross and overall taxable income for that year.

The method of adjusting income tax varies by business structure:
Sole proprietorships report business income and expenses on Schedule C (Form 1040), reducing their wage expense deduction.
Partnerships and multi-member LLCs file Form 1065; the ERC adjustment impacts their ordinary business income, flowing through to partners’ individual tax returns via Schedule K-1.
S corporations file Form 1120-S; the adjustment affects their ordinary business income and amounts reported on shareholder K-1s.
C corporations file Form 1120; the ERC directly reduces their deductible wage expense, increasing corporate taxable income.

Preparing to Amend Your Tax Return

Amending a tax return for the Employee Retention Credit requires careful preparation. The initial step involves gathering all necessary documents: a copy of the original income tax return(s) for the affected year(s), the precise ERC amount received, and detailed records of qualified wages used to determine the credit. Having these documents ensures accurate figures for amendment.

Once documents are collected, recalculate the adjusted taxable income for the relevant tax year. This involves increasing the business’s taxable income by the portion of wages previously deducted but now offset by the ERC. For example, if a business deducted $100,000 in wages and received a $20,000 ERC, the wage deduction is reduced by $20,000, increasing taxable income. This adjustment affects income tax return lines like wage expense, impacting gross receipts, total deductions, and ultimately, ordinary business income or net profit.

Identifying the correct amendment form is crucial, as it depends on the business’s legal structure:
Individuals and sole proprietors use Form 1040-X, Amended U.S. Individual Income Tax Return, to correct personal income tax, including Schedule C business income.
Corporations typically use Form 1120-X, Amended U.S. Corporation Income Tax Return.
Partnerships and multi-member LLCs generally file Form 1065-X, Amended Return or Administrative Adjustment Request (AAR).
Each form reports original figures, net change, and corrected amounts for affected line items.

When completing these forms, understand their specific requirements. Each form typically has columns for the original, net change, and corrected amounts. A clear explanation for the amendment must be provided in the designated section. For instance, on Form 1040-X, the “Explanation of Changes” section requires stating the amendment is due to reducing wage expense by the Employee Retention Credit amount.

Taxpayers must also be aware of amendment deadlines. Generally, an amended return must be filed within three years from the original filing date or two years from the tax payment date, whichever is later. This timeframe is important for claiming potential refunds. If the original return was filed early, it is considered filed on its due date for this deadline.

Amending and Submitting Your Tax Return

Once preparatory steps are complete, including recalculating taxable income and identifying forms, complete and submit the amended tax return. Forms must be accurately filled out, ensuring all required fields like taxpayer name, identification number, and tax year are correctly entered. After transcribing figures, sign and date the return to validate submission.

Amended tax returns are generally submitted by mail, as most cannot be e-filed. While Form 1040-X may offer e-filing for current and two prior periods via tax software, paper filing is common, especially for older tax years. The mailing address depends on the return type and taxpayer’s state. Consult IRS instructions or the IRS website for the correct address. Send amended returns via certified mail with a return receipt for proof of submission.

If the amendment results in additional tax due, the IRS will provide payment instructions. If it leads to a refund, the IRS will process it after the amended return is processed. Note that the “Where’s My Refund?” tool does not update for amended return refunds; use the “Where’s My Amended Return?” tool instead.

Taxpayers can track their amended return status using the IRS’s “Where’s My Amended Return?” online tool. This tool typically provides an update three weeks after submission. Processing times vary; the IRS generally advises allowing 8 to 16 weeks, though some cases may take longer. Keep copies of all submitted documents, including the amended return and supporting schedules, for personal records. The IRS may request additional information, and prompt responses can prevent delays.