On March 21, 2025, the IRS updated its FAQs to provide new instructions for reporting employee retention credit (ERC) refunds for taxpayers who claimed the ERC for wages paid in 2020 or 2021 but have not yet amended their prior-year returns to reduce wage expenses.

Taxpayers who receive an ERC refund (e.g., in 2024 for a 2021 claim) can report the overstated wage expense as income in the tax year they receive the refund. For example, a 2024 ERC refund related to 2021 wages would trigger income on the 2024 tax return equal to the ERC amount received. Taxpayers can still choose to amend their prior-year returns or file an administrative adjustment request (AAR).

The IRS also addressed situations where an ERC claim was disallowed after a wage expense had already been reduced. In such cases, taxpayers can increase their wage expense in the tax year the ERC claim disallowance becomes final.

Confused about reporting your Employee Retention Credit (ERC) refund? Contact Frost Law today for guidance on how this affects your tax returns.