How To Record The Employee Retention Credit In Financial Statements
Read our guide to everything you need to know about how to enter the employee retention credit on your financial statements and in your accounting software.
On 11/14/23, IRS Commissioner Daniel Werfel announced that the IRS is updating its ERC review procedures and will begin processing new ERC claims in the near future following the moratorium implemented in September. Existing claims are still being processed and eligible businesses can still submit an ERC claim through reputable ERC specialists to be processed when the moratorium ends. Visit our full breakdown of the ERC pause for the latest information.
Whether you already claimed your employee retention credit or you’re filing an amended return to retroactively receive a refund, you have to record this transaction for your financial statements. In this post, we’re going to take a look at how to record the employee retention credit in your accounting software.
We’ll take a look at how to record the credit if you claimed it on your original return, received the credit as a refund, or are waiting on your refund. We’ll also discuss when you should hire an accountant or tax professional.
Whether you still need to apply for the ERC or you want to learn how to calculate your potential refund for the ERC, we are here to help. Keep reading to learn more about how to record the ERC in accounting software and financial statements.
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How To Record The Employee Retention Credit In Accounting Software
To properly balance the books for your business, you’ll need to record the employee retention credit in your accounting software. How you record this transaction depends on whether you claimed the credit when initially filing your quarterly return, if you’re waiting on an ERC refund, or if you retroactively claimed the refund and have received it. Here are the steps to recording the ERC no matter what situation you’re facing.
Step 1: Record Your Tax Payment In The General Ledger
The first step to recording the employee retention credit in your accounting software is to record your original quarterly tax payment to the government in your general ledger. To record this payment, you will:
- Debit the Income Tax Expense account
- Credit the Cash account
If you claimed your tax credit at the time of filing your quarterly income tax return, you can stop here. But if you’re retroactively claiming the tax credit for an ERC refund, proceed to the next step.
Step 2: Create An Accounting Entry For An Anticipated ERC Refund
If you haven’t yet received your ERC refund, you will complete this step for recording your anticipated refund. If you have already received your ERC refund, you can move on to step three.
Recording an anticipated ERC refund is a two-part process. You will begin by:
- Debiting the Income Tax Receivable account
- Crediting the Income Tax Payable account
This step is taken when you are still waiting on your ERC refund.
Once you have received the refund, go back to your accounting software. At this time, you will:
- Debit the Cash account
- Credit the Income Tax Receivable account
Once you’ve completed these steps, you’re finished and do not have to move on to step three.
Step 3: Create An Accounting Entry For Your ERC Refund
If you aren’t waiting on your ERC refund and have already received it, you can bypass step two and jump right to step three.
When you’ve received your refund and need to record it in your accounting software, simply:
- Debit the Cash account
- Credit the Income Tax Expense account
When To Hire An Accountant To Record The ERC In Financial Statements
In most cases, recording the employee retention credit in your financial statements using accounting software isn’t too difficult. However, there may be instances where your tax situation is a little more complex and requires the assistance of an accountant or tax professional.
While there are expenses associated with hiring a professional, avoiding errors now that could lead to bigger problems down the road is often worth it for many organizations. Here’s when you should consider hiring a professional:
- You paid ERC fees to a third-party service to retroactively claim your ERC
- You operate a nonprofit organization
- Your business is set up as a corporation
- You’re new to accounting software and have questions regarding how to properly record your ERC
The Bottom Line On Recording The Employee Retention Credit In Financial Statements
The employee retention credit should always be recorded in your financial statements through your accounting software, whether you received the credit on your original quarterly return or you’re still waiting on your refund. In most cases, recording these transactions is fairly straightforward. However, don’t hesitate to reach out to an accountant or tax expert if you encounter difficulties along the way.
And if you haven’t yet claimed your ERC, what are you waiting for?
It’s not too late to retroactively claim this credit and receive a refund from the IRS. Check out Merchant Maverick’s other employee retention credit content to learn more about qualifying for the ERC, claiming the ERC, finding the best companies for the ERC credit , and more. With just a few easy steps, you could receive a refund of extra cash to put back into your small business. Good luck!