By Mark Puckett, CPA | Tax Principal
The Top Line
On March 20, 2025, the IRS issued new guidance on how to handle Employee Retention Credit (ERC) refunds—specifically regarding whether businesses need to amend prior-year tax returns. The update provides long-awaited clarity and relief for businesses that were unsure about how to treat ERCs they received after filing their original returns.
This new guidance allows eligible businesses that did not reduce their wage expenses in the original filing year to instead report the ERC as gross income in the year the credit is received. For many small and mid-sized businesses, this is a simpler and more manageable solution that avoids the burden of filing multiple amended returns.
Breaking It Down – What the New IRS Guidance Means for Your Business
ERC Background: A Common Scenario
Many businesses have received—or are still awaiting—ERC refunds for qualified wages and benefits paid during 2020 and 2021. Historically, the IRS required these businesses to amend their original tax returns to reduce wage expenses by the amount of the ERC claimed, following guidance from Notice 2021-20 and 2021-49.
However, as time has passed, many clients have opted to include the ERC as income in the year it was received, unsure if this method would meet IRS standards. Until now, there’s been uncertainty and concern about penalties or invalidation of the ERC due to the lack of amended returns.
New IRS Guidance Brings Clarity
The IRS now confirms that filing an amended return is no longer required in this common situation.
Instead: Taxpayers who did not reduce wage expenses in the original year may report the ERC as gross income in the year the credit is received.
This aligns with the IRS’s tax benefit rule and avoids the double benefit of deducting wages and also receiving the ERC.
What You Need to Know – IRS FAQs Summarized
Q1: Should I have reduced my wage expense in the year I claimed the ERC?
A1: Yes, the IRS originally expected wage expense to be reduced in the year wages were paid or incurred. But the new guidance offers flexibility for businesses that didn’t do so.
Q2: What if I didn’t amend my return but received the ERC in a later year?
A2: You’re not required to amend the prior-year return. Instead, include the ERC amount as gross income in the year you receive the refund.
Example:
A business claimed a $700 ERC based on $1,000 in wages paid in 2021 but did not reduce wage expenses on the 2021 return. The IRS paid the ERC in 2024. The business may now include the $700 in gross income on its 2024 tax return—no need to amend 2021.
Other Considerations
If you capitalized wages or didn’t reduce your tax liability based on the overstated deduction, you may not need to report it as income but instead adjust your basis or other records accordingly.
What This Means for You
This guidance simplifies ERC compliance and answers a major open question for businesses still waiting on refunds. Instead of tracking down prior returns and preparing amendments, you can focus on current-year tax reporting.
Ask yourself:
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Have you received ERC refunds after filing your original returns?
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Did you include the ERC in income in the year you received it?
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Are you unsure whether an amended return is necessary?
If the answer to any of these is yes, this new IRS position likely works in your favor.
Let’s Talk ERC Strategy
This is good news for businesses and advisors—especially those balancing multiple year-end adjustments. We’re here to help interpret the guidance and make sure your reporting is accurate and compliant.
Got questions? Let’s talk about how this affects your business.