Many business owners who maintain Employee Retention Credit (ERC) now want to ask how to properly record it in QuickBooks Online. The ERC was created to help employers keep workers on the payroll during tough times but once the refund arrives then it is important to make sure that it is entered correctly in your books. If you record it in the right way then it keeps your financial reports accurate and helps you stay compliant when filing taxes. In this blog, we will guide related to how to record employee retention credit in Quickbooks Online, preparation before recording and best practice in detail.
What is Employee Retention Credit?
Employee retention credit is a tax credit which was created by the government to help businesses to keep their employees on payroll during the COVID-19 pandemic. Record this credit correctly in QuickBooks Online is important because it affects your income, payroll, and tax reports. This helps you keep accurate records to ensure your books stay clear and your financial statements show the true impact of the ERC on your business.
ERC(Employee Retention Credit) allows eligible businesses to get back a portion of the wages and health insurance costs they paid to employees during specific periods in 2020 and 2021. It is not like a loan, it is a refundable credit which means you did not have to pay it back.
How ERC(Employee Retention Credit) Affects Your Accounting?
Here we explain how ERC affects your accounting, mentioned below.
- ERC has an impact on your accounting because it directly affects your payroll, taxes, and overall financial reporting.
- ERC reduces the payroll taxes which your business owes or comes as a refundable credit.
- It needs to be recorded correctly in your books to reflect the actual financial benefit.
- From an accounting perspective, it is recorded as other income or as a reduction in payroll expenses, depending on your accounting preference.
- Recording the ERC correctly gives a clear picture of how the credit impacts your business finances.
Preparation Before Record Employee Retention Credit in QuickBooks Online
Record Employee Retention Credit in QuickBooks Online, it is necessary to prepare a few things so that everything goes smoothly and your records stay accurate.
- First, review your payroll setup to ensure eligible wages and plan costs are identified.
- Next, decide how you should treat the credit in your books as other income or a reduction of payroll expenses.
- Then create a dedicated account in the Chart of Account like “Employee Retention Credit or Other Income”.
- You need to gather all relevant documentation such as IRS notices, amended tax filings, worksheets showing how the ERC was calculated.
- Make sure your bank deposit or refund will be matched to the correct year/quarter in your books.
- Consult your accountant so that the treatment aligns with your tax strategy and financial reporting.
Steps to Record Employee Retention Credit in QuickBooks Online
Record employee retention credit in QuickBooks Online is a straightforward process if you follow these steps which are mentioned below.
Create a Dedicate Account for ERC
- In QuickBooks Online, go to Accounting and select Chat of Account then click on New.
- Choose an accounting type like Other Income then name it “Employee Retention Credit – Other Income”.
- This helps to keep your income separate from your regular income and make tracking easy.
Record ERC Deposit or Refund
- If you receive a refund check or direct deposit then go to New and select Bank Deposit.
- Select your bank account or choose an Employee Retention Credit income account then enter the amount or save it.
Apply ERC Against Payroll Taxes(if needed)
- If you use credit to reduce payroll tax then record journal entry.
Debit: Payroll tax liability.
Credit: ERC income Account.
- This ensures your books reflect reduced tax payment accurately.
Adjust Payroll Expenses(if necessary)
If ERC applied to wages already recorded as expenses then adjust your wages or payroll expenses accounts to avoid double counting.
Reconcile Your Accounts
Now check your bank statement and QuickBooks to ensure that the deposit or tax offset matches the actual credit received.
Add Notes or Tags for Tracking
You can use memos, classes and sub-classes to note which period or quarter ERC apply. It helps with reports and audits later.
Review with Your Accountant
Since employee retention credit should impact payroll, taxes and financial statements then confirm with your accountant that your entries align with IRS and your tax strategy.
How to Calculate the Employee Retention Credit in QuickBooks Online?
Calculating employee retention credit is essential to record it in QuickBooks Online accurately. These credit is based on wages you paid to employees during the period when your business was affected by COVID-19. If you want to calculate it then first identify eligible wages which include plan costs for the relevant period. After that apply IRS to specified credit percentage, 50% of eligible wages for 2020 and 70% for 2021.
If other payroll credits were applied then subtract those from your total. The result number of ERC amount your business can receive as refund or apply against payroll taxes. Keep a clear record of these calculations to ensure accurate bookkeeping and simplify entry into QuickBooks Online.
Common Mistakes to Avoid
Here are some common mistakes to avoid when you record ERC refund in QuickBooks Online which are mentioned below.
- Misclassifying the employee retention credit.
- Not tracking eligible wages correctly.
- Forgetting to adjust payroll taxes.
- Skipping accounting set up.
- Incorrect accounting period.
- Not consulting an accountant.
Best Practices
Here are a few best practices of record employee retention credit in QuickBooks Online, mentioned below.
- Create a separate account in your Chart of Accounts for the Employee Retention Credit.
- Use clear descriptions or memos for each ERC transaction.
- Record the ERC in the correct accounting period.
- Keep all supporting documents like IRS letters and payroll reports.
- Reconcile your bank and QuickBooks records regularly.
- Avoid mixing ERC entries with regular income or payroll.
- Consult your accountant for proper classification and accuracy.
Conclusion
In conclusion, we hope this blog helps you to understand how to record employee retention credit in QuickBooks Online easily. This blog gives you a step by step guide to record employee retention credit in QuickBooks Online and helps to understand how it is affecting your accounting. If you have any queries then contact our expert and experienced ProAdvisor team to fix your problem.