Posting an Employee Retention Tax Credit Refund Check

The retention credit does not reduce your liability, only the amount you owe. Since you submitted payments in full you received a refund check. This check does not change your actual liability but is instead a "fully refundable tax credit" That does not mean it reduces actual taxes but is applied against taxes owed. You would have been allowed to reduce your eftps payment requirement for employer SS. As an "overpayment" this excess or full amount was refunded. I have attached a page from the IRS further explaining

COVID-19-Related Employee Retention Credits: General Information FAQs | Internal Revenue Service (ir...

Change your

2. to interest goes to Interest Income and the tax credit to Non-Taxable Income, not payroll expense contra or it will make your W3 wrong without affecting employees

3. delete your journal entry as it is in error as I have described above

Thanks for the reply and the thoughtful answer.  I'm a little confused though.  The credit covered our quarter 2 tax amount owed fully, so that we did not pay anything that quarter in our filing, and the remainder of the credit was sent to us as an "overpayment."  I get that part, and have recorded them as you said. 

However, I don't understand how the taxes "owed" in the liability accounts for Q2 ever get zeroed out if I don't create a journal entry to lower those totals by the amount that the tax credit "paid."

Do they just sit on the balance sheet in perpetuity?

Thanks for the reply and the thoughtful answer.  I'm a little confused though.  The credit covered our quarter 2 tax amount owed 100%, so that we did not pay anything that quarter in our filing, and the remainder of the credit was sent to us as an "overpayment."  I get that part, and have recorded them as you said. 

However, I don't follow how the taxes "owed" in the liability accounts for Q2 ever get zeroed out if I don't create a journal entry to lower those totals by the amount that the tax credit "paid."

Do they just sit on the balance sheet in perpetuity?

@aejeffor Did you receive your answer?  To record a deposit for the refund of liabilities (which are, as you say, sitting on your balance sheet as an overpayment):

From the Payroll Center, Go to the Pay Liabilities Tab.  In the Other Activities section at the bottom center, you will see Deposit A Tax Refund.  Click the link, fill in the tax agency name, the amount of the refund (ignoring any interest included) and the name of the affected payroll item(s) with the appropriate amounts.  If you already have a reconciled deposit for the refund, select Group With Other Undeposited Funds.  Then navigate to the deposit, add this payment to that deposit, and delete the prior line item.  Record any interest in the deposit screen.  Hope that's clear.

However....what I suspect is happening here is that QBDT is not recording any change in the liabilities at all.  So then the proper procedure would be to "pay" the liabilities (dated at the time they were due), and enter a negative offset to the Cares Retention Credit payroll item that you set up.  If you don't have that item, you can click on the Expenses tab and enter a negative to the Covid Expenses GL account (the same place your Qualified Wages went.  Click on recalculate so the payment check is a net zero and save and close.  That will clear your liability.  Then when the refund check comes in, there is no more liability to clear, so you deposit the check to your bank account, using the Covid Expenses account as the offset.  Does that make sense?

One more thing - I think the CARES Retention Credit - Other Tax items setup directions are incorrect.  When overpaid and refundable, the credit should decrease the liability (into the negative) and decrease the CARES expenses expense account.  For those of us filing retroactively, we need to record the expected liability refund and decrease our expenses by the amount of the credit, which we probably won't receive until June.  As it is currently setup per the Intuit instructions, the credit simply goes in and out of the expense account without affecting anything.  But as of 12/31, I really do have an overpayment of my taxes and an expense that is 50% of the ERTC wages (not 100%), and that should be reflected in my books!

We are a small business and since we do our own payroll, we filed a 941-X form for 4Q20 in hope to get the refund for the Employee Retention Tax Credit.  Can you let me know if this was the process you went through to get the refund?  Did you get notified by the IRS that they process your request?  We are unable to find any information online and how to find out the status of our request.

Thank you in advance.

I see no one answered this, yet. Yes, you did the right thing to net the refund for Q4, 2020. They did offer a revised copy of the Q4 941 that would have allowed you to claim the credit on your initial filing, but it was only available for a short window before the due date, and many had already submitted their standard Q4 941. The 941-X is the means to net the refund after the fact. We did not get any notification from the IRS that they had received our 941-X, and we have still not gotten the refund for our Q1 & 2 941-X (they were combined on Q2 filing for 2020, as the ERTC credit was retroactive to Q1 in 2020.) We just got the refund from our Q1 2021 filing, which was not a correction, but the initial form, so it took 6 mos. to get that. Only indication that they processed it was the check we just got. They do include interest, which must be recorded as interest income.

Is excess ertc tax credit received realized as other income on the P&L?  Thanks in advance for your help.

Hi there, @AZ7713.

The posting of the credit depends on how the transaction is added to QuickBooks. The accounts used while tracking the credit play a big factor in realizing the credit on your reports. If it adds up to your income, it will show up on your Profit and Loss report. On the other hand, if the credit deducts your liabilities, then it'll post to your Balance Sheet report.

You may ask help from your accountant in tracking the credit to post the amount on your reports accordingly.

On the other hand, here's how you can learn more about employee retention credit: COVID-19-Related Employee Retention Credits: General Information FAQs.

To learn more about running your QBDT reports, you can also skim through the topics from this link: Understand reports.

If you have any other questions about retention credit, let me know by adding a comment below. I'm always here to help. Have a good one!

Thank you valprice1 for confirming what I suspected was true.  That's what happens when non-accountants write these programs.  Nothing against the programmers, kudos to all to them for making it through all the changes.

Forms 941X I completed back in March and April 2021 are just now coming in!  Some included owner's and spouses as they were applied for prior to the long awaited guidance from the IRS issued August 8 (forget the notice #).  So now those ERC credits must be returned and a new form 941X filed.  I'm not going to go through the exercise of running through QB payroll, I know already know I will end up totally frustrated and spending hours I don't have.  I have one client who, on their second round for the same ERC received the payments now we must return again.  Will follow your instructions as they sound logical from an accounting standpoint.

Lucky you taitinc Level 1.  ERC applied for via form 941X March/April 2021 or just now coming in (March April 2022).

My QB does not have a deposit a refund in the other activities can it be someplace else?

Good morning Brogan1,

Thanks for chiming in on the thread! Could you share which version of Quickbooks you use? This will be extremely helpful! 

See you in a few! I will be awaiting your response.