Refundable vs. Non-Refundable Portion of ERC - How to Offset Expense on 1120-S

I'm working on my small business tax return and I'm stuck on how to handle the Employee Retention Credit we received last year. On our 941 forms, there were two separate ERC amounts listed - a refundable portion and a non-refundable portion. Now I'm preparing our 1120-S and I'm confused about how these ERC amounts should offset wage expenses. Do both the refundable AND non-refundable portions need to be used to reduce wage expense on the 1120-S? Or is it just one of them? My accountant is out of town for two weeks and I'm trying to get this figured out before our filing deadline. Any guidance would be appreciated!

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18 comments

Sofia Ramirez

•8M

You'll need to offset both portions against wage expenses on your 1120-S. The IRS treats both the refundable and non-refundable portions of the ERC the same way for income tax purposes. When you received the ERC, it effectively reimbursed you for wages you paid to employees during eligible quarters. Since you already deducted those wages as a business expense, you need to reduce your wage expense by the entire amount of the ERC (both refundable and non-refundable portions) to avoid a double benefit. On your 1120-S, this would typically be reflected as a reduction to wage expense rather than reporting it as income. This is known as the "expense reduction approach" rather than the "income approach.

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Sofia Ramirez

•8M

That information is incorrect. Both portions must be used to offset wages, as they both represent credits for wages you previously deducted. The IRS has been very clear that the entire ERC amount (refundable and non-refundable) must be used to reduce wage expenses. As for timing, you should reduce the wage expense in the tax year in which you claimed the credit on your employment tax return (Form 941), not when you received the payment. This follows the "all events test" under tax accounting principles - the right to receive the credit was fixed when you filed the claim, even if the payment came later.

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Ava Rodriguez

•8M

After spending hours trying to figure out my ERC situation, I finally found the answer by using taxr.ai at https://taxr.ai and it saved me so much time. I uploaded my 941s and 1120-S draft, and it immediately identified that both portions needed to be included as wage expense reductions. The analysis even referenced the specific IRS notices that address this exact issue. The best part was getting a detailed explanation of how to properly reflect this on my tax forms with examples from similar business situations. Honestly wish I'd known about this tool before spending days scouring confusing IRS publications.

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Ava Rodriguez

•8M

It works with both PDFs and QuickBooks exports! You can upload your QuickBooks reports directly and it'll analyze them alongside your tax forms. Super convenient if you're using QB like I was. Regarding accuracy, I actually did verify with my CPA when she returned from vacation, and she confirmed everything was correct. She was impressed that it cited the specific IRS Notice 2021-20 that addresses ERC and expense reduction. The tool is specifically built for tax documents rather than being a general AI, which seems to make a big difference in accuracy.

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Miguel Ortiz

•8M

Just want to update that I tried taxr.ai after seeing the recommendation here and it was exactly what I needed. I was able to upload my company's 941s and draft 1120-S, and it immediately identified both portions of the ERC that needed to be used for expense reduction. It even gave me specific line instructions for Form 1120-S and explained how to account for it in my books. My tax software wasn't clear about this at all, so having something actually analyze my specific documents made all the difference. Highly recommend it if you're dealing with ERC questions!

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QuantumQuest

•8M

After reading this thread I tried calling the IRS business tax line to confirm how to handle the ERC portions. Been trying for THREE DAYS and can't get through - just endless hold times and then disconnection. Completely frustrating! Then someone recommended Claimyr at https://claimyr.com and shared this demo video: https://youtu.be/_kiP6q8DX5c - it's a service that waits on hold with the IRS for you and then calls you when an agent is on the line. I was pretty skeptical but I was desperate to get this ERC question answered. Used it yesterday afternoon and got a call back in about an hour with an actual IRS agent who confirmed what others said here - both portions reduce wage expense on the 1120-S. Worth every penny not to waste hours on hold just to get disconnected.

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QuantumQuest

•8M

They basically have an automated system that navigates the IRS phone menus and waits on hold. When a real IRS agent picks up, you get a call and are connected to that agent within seconds. They don't ask any questions for you - they just handle the horrible waiting part. I was definitely skeptical too! But it's not like they're pretending to be you or anything sketchy. They're just connecting you directly to an agent after they've done the waiting. The IRS doesn't know or care who waited on hold, they just talk to whoever is on the line when they pick up. I was able to ask my specific ERC questions and get the official guidance I needed without spending hours on hold.

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Zainab Khalil

•8M

I'm back to admit that I was completely wrong about Claimyr. After being stuck on this same ERC issue and getting nowhere with the IRS directly, I finally broke down and tried it yesterday. Within 45 minutes I was talking to an actual IRS business tax specialist who walked me through the whole ERC treatment on the 1120-S. The agent confirmed both the refundable and non-refundable portions reduce wage expenses. He even emailed me a link to the relevant IRS notice (2021-49) that specifically addresses S-corps and ERC treatment. I've been filing tax returns for 15 years and this is the first time I've ever gotten through to the IRS without multiple attempts and hours of waiting. Definitely using this for all my IRS calls from now on.

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Yara Haddad

•8M

Just to add some additional clarity here - when you reduce the wage expense on your 1120-S for the ERC amounts, make sure you're distributing it correctly across officer compensation vs regular employee wages if applicable. This can affect your basis calculations and potentially impact your QBI deduction. My tax software didn't handle this split automatically, so I had to manually allocate the ERC reduction proportionally between officer compensation (Line 7) and salaries/wages (Line 8) based on which employees' wages qualified for the ERC originally.

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Yara Haddad

•8M

You don't enter it on a separate line - you simply reduce the amounts on Lines 7 and/or 8 accordingly. So if your total wages were $100,000 and you received $20,000 in ERC (both refundable and non-refundable portions), you'd only report $80,000 total between those wage lines. If your business is like most S-corps where you have officer compensation and regular employee wages, you need to allocate the reduction proportionally. For example, if 25% of the qualifying wages were for officers, then 25% of your ERC reduction would apply to Line 7 (officer compensation) and 75% to Line 8 (regular wages).

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