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Is the Employee Retention Credit Taxable?

by Lois Earles
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Do employees have to pay taxes on the Employee Retention Credit? During COVID-19, small firms benefited greatly from the employee retention credit. Because of this, more than 30,000 of them were able to amass over a billion dollars in credit. These companies benefited tremendously from this huge credit sum. How? In 2020, they were reimbursed up to half their qualifying wage costs, up to a maximum of $10,000 per worker. So, each worker’s total qualifying wages are now $5,000.

In 2021, the law was changed to allow a 70% deduction for the first $10,000 in quarterly payments for eligible firms. This brings the annual cap on the credit for each worker to $28,000. Given the scale of the potential refund, it begs the question of whether or not the employee retention credit constitutes taxable income. To learn more about ERC, you can check this article.

Is There A Tax Deduction For Keeping Good Employees? – How Taxes And Refunds Are Linked

Please keep in mind that the employee retention credit is not a tax in and of itself. Instead, it is a refundable tax credit for eligible salaries paid to employees. According to the rule, by 2020, businesses cannot give more than $5,000 in credit to each of their employees. In contrast, in 2021, the maximum credit for an individual worker is $28,000.

It’s clear from the procedure that the ERC is subtracted from the final take-home pay. The IRS notice for the tax year 2020–2021, Questions and Answers (Q&A) 85 and 86, and Q&A 60–61 all address the disallowance of this credit as an expense.

There are a lot of regulations to follow, so it’s natural to feel confused. According to FAQ 85, however, the IRS statute does not allow for salary deductions that are more than certain credits for a given tax year. As a result, you must deduct the amount of the ERC credit from your total deductions.

According to FAQ 86, the gross income credit for federal income tax is not required of businesses that receive a credit tax for healthcare expenditures and eligible wages. As a result, you cannot use this credit if you want to reduce your employer’s share of employment taxes. A portion of the credit that is refundable is also not eligible.

ERC’s Effect On Income Tax Returns

According to IRS Form 280C, there should be no tax due on the refund. In contrast, the credit amount will reduce the salary by the credit amount. When making this deduction, the year in which the salaries were actually paid will be used as the basis. Thus, regardless of whether or not you really got the money, a credit for the year 2021 will appear on your tax return.

However, if you didn’t file for ERC in 2020 or 2021 and now want to claim in 2022, you won’t be able to adjust your earnings for that year. Similarly, partnerships that operate as businesses should seek an adjusted administrative procedure. When there are no pay or credit adjustments to report, small businesses file amended tax returns.

Provisions For The ERC In 2021

Each worker’s maximum credit was increased by the ERC in 2021. Therefore, firms can apply for 70% of each $10,000 for qualified compensation for every quarter. The minimum amount of annual revenue that must be earned has also dropped.

The disallowance of ERC costs that were in effect in 2020 will continue to apply in 2021. Since most businesses claim the 2021 ERC every quarter, the expense disallowance does not cause timing to be much of a concern.

What Happens If A Company Hasn’t Registered Or Filed For ERC?

To avoid any confusion, your credit cannot be claimed through the annual income tax return. Since ERC is no longer involved, you will need to file a 941-X amended return to get any refunds due to you.

According to government regulation, firms may file an amendment to their Form 941 up to three years after the form was originally submitted. Therefore, if you were not claiming your ERC in 2020 or 2021, you still have time to go for it.

Once you’ve made the decision to claim the ERC, you’ll need to make an amendment to your tax return for each quarter in 2020 and 2021 for which you were eligible. Therefore, consulting an expert who has worked with ERC tax filings is the best approach to guarantee you get every deduction you’re entitled to.

Conclusion

If you’re wondering if the employee retention credit counts as taxable income, the answer is no. But it does affect your income tax return. However, even if this is the case, the benefits of the credit outweigh any potential tax consequences for your company. In that case, it’s entirely up to you to decide.

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