This article will help you enter the Employee Retention Credit on your client's income tax return. Although the credit is claimed on payroll filings (Form 944, 941, or equivalents), you may need to adjust amounts on the tax return to account for the credit claimed.
As part of the American Rescue Plan Act of 2021, the Employee Retention Credit is extended from June 30, 2021 to December 31, 2021.
If you are looking for information about being in limbo from taking the credit before it was repealed, see the IRS FAQ on this matter.
Partnership:
- Go to Screen 13, Deductions.
- Enter the amount of Salaries and wages before any reduction.
- Enter the credit as a positive number in Less: Employee retention credit claimed on employment tax returns.
The wage expense deduction on Form 1065, line 9 will be reduced by this amount. Nonconforming states will also subtract this amount on the state return.
S Corporate:
- Go to Screen 15, Deductions.
- Enter the amount of Salaries and wages before any reduction.
- Enter the credit as a positive number in Less: Employee retention credit claimed on employment tax returns.
The wage expense deduction on Form 1120S, line 8 will be reduced by this amount. Nonconforming states will also subtract this amount on the state return.
Corporate:
- Go to Screen 20.1, Deductions.
- Enter the amount of Salaries & wages, other than officers before any reduction.
- Enter the credit as a positive number in Less employee retention credit claimed on employment tax returns.
The wage expense deduction on Form 1120, line 13 will be reduced by this amount.
Why is a Schedule M-1 adjustment generating for the credit amount?
By default, the program will create an M-1 adjustment for the credit as an expense recorded on books not on the Schedule K. This may not be accurate for all taxpayers, so the following informational diagnostic will generate:
This return contains Schedule M-1 adjustments for refundable employment tax return credits...These Schedule M-1 adjustments may not be necessary for this return. If you wish to suppress the calculation of these Schedule M-1 adjustments, enter 2 in "Schedule M-1 adjustments for refundable employment tax return credits" (ref. 55313, 55320, or 55321).
To eliminate the M-1 adjustment on one return:
- Click on the diagnostic to jump to the Balance Sheet Miscellaneous screen.
- Enter a 2 in Schedule M-1 adjustments for refundable employment tax return credits.
Or, to eliminate the M-1 adjustment for all returns in this tax type:
- Click on the Settings menu at the top of Lacerte, then press Options.
- Select the Tax Return tab.
- Scroll down to the Federal Tax Options section.
- Set Sch. M-1 Adjustments for Refundable Employment Tax Return Credits to No.
Individual returns
Schedule C:
- Go to Screen 16, Business Income (Sch. C).
- Scroll down to the Expenses section.
- Enter the Total wages before any reduction.
- Enter the Employee retention credit claimed on employment tax return as a positive amount.
The wage expense deduction on Schedule C, line 26, will be reduced by the credit amount.
Schedule E:
- Go to Screen 18, Rental and Royalty Income (Sch. E).
- Scroll down to the Expenses section.
- Enter the Wages and salaries before any reduction.
- Enter the Employee retention credit claimed on employment tax return as a positive amount.
The wage expense deduction on Schedule E, line 26, will be reduced by the credit amount.
Schedule F:
- Go to Screen 19, Farm Income (Sch. F, 4835).
- Scroll down to the Farm Expenses section.
- Enter the Labor hired before any reduction.
- Enter the Employee retention credit claimed on employment tax return as a positive amount.
The labor hired deduction on Schedule F, line 22, will be reduced by the credit amount.
