How to report the Employee Retention Credit on Form 1120S?

An S corporation does not report the ERC as taxable income on Form 1120-S.

Instead, the ERC is treated as a reduction of deductible payroll expenses for the year to which the credit relates.

This means:

• You do not include ERC as “Other income”
• You reduce wage deductions by the amount of the ERC
• The adjustment flows through to shareholders via Schedule K-1

Step-by-Step: Reporting ERC on Form 1120-S

Determine the Correct Tax Year

The ERC must be reflected in the tax year in which the qualified wages were paid, not the year the refund was received.

This applies even if the ERC was claimed retroactively by filing Form 941-X.

Reduce Wage Deduction on Page 1

On Form 1120-S, Page 1:

• Line 7 – Compensation of officers
  → Reduce by ERC attributable to officer wages (if applicable)
• Line 8 – Salaries and wages
  → Reduce by ERC attributable to non-officer employee wages

You reduce only the deductible portion of wages related to the ERC.

Do Not Report ERC as Income

• Do not report ERC on:
  
  • Line 5 (Gross receipts)
  • Line 6 (Other income)
  • Schedule K, Line 10 (Other income)

The IRS has been explicit that the ERC is not includible in gross income, but instead disallows the wage deduction.

Flow-Through to Shareholders (Schedule K-1)

Because wage deductions are reduced:

• Ordinary business income (loss) on Schedule K, Line 1 changes
• The adjusted income flows to shareholders on Schedule K-1, Box 1

No separate ERC line item is required on the K-1.

If You Already Filed the 1120-S Without the ERC Adjustment

You generally must:

• File Form 1120-S (Amended) for the affected year
• Reduce wage deductions in that year
• Issue amended Schedule K-1s to shareholders

This is required even if the ERC refund was received in a later year.

Common Errors to Avoid

• Reporting ERC as “Other income”
• Recognizing ERC in the year cash was received
• Failing to amend prior-year 1120-S returns
• Leaving shareholder K-1s uncorrected

Simple Example

• 2021 qualified wages: $200,000
• ERC claimed: $60,000

Correct reporting on 2021 Form 1120-S:

• Wage deduction reduced from $200,000 → $140,000
• No ERC income reported
• Shareholder ordinary income increases by $60,000

Summary

On Form 1120-S, the ERC is reported by reducing wage deductions—not as income.

The reduction must be made in the year the qualified wages were paid, even if the refund was received later, and the adjustment flows through to shareholders via Schedule K-1.

Related Questions

• Can I claim the Child Tax Credit if my only income was Social Security benefits?
• Can I file a form 1065 for a single member llc?
• What can cause my refund to be higher than the federal withholding on my W-2?

Sources:

IRC §280C(a) - Disallowance of wage deduction for credits

IRS Notice 2021-20, Q&A 60 - ERC wage deduction reduction

IRS Notice 2021-49, §III(E) - Timing of wage disallowance

Form 1120-S Instructions - Ordinary business income and wage deductions

Form 941-X Instructions - ERC correction procedures