How To Record The Employee Retention Credit In Financial Statements

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 are wanting 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.

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 simply debit your Income Tax Expense account, while crediting 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 like many small business owners and are retroactively claiming the tax credit for an ERC refund, you’ll need to 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 in your software while 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, you will need to return to your accounting software. At this time, you will debit your Cash account, and record a credit to 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 your Cash account and record a credit in 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 fees to a third-party service to retroactively claim your ERC
• You operate a non-profit 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 out the best vendors for ERC funding, 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!

FAQs About How To Record The ERC In Financial Statements