The employer tax credit (ERC) is not considered taxable income, but, under IRC Section 280C, it results in a decrease in pay equal to the amount of the credit. Therefore, the employee retention credit affects your income tax return. However, there are many benefits associated with receiving the credit that outweigh the tax implications.
You should know many things about Employee Retention Credit taxable income, which you can consider and get various benefits when filing taxes.
Key ERC Credit Takeaways You Will Learn:
- ERC Taxable Income: Understand how Employee Retention Credit impacts taxable income.
- ERC on Tax Returns: Learn how ERC affects and is reported on tax returns.
- IRC Section 280C: Discover the rules associated with IRC Section 280C.
- Qualified Wages: Gain knowledge about what qualifies as wages for the ERC.
- ERC Updates: Stay informed about the latest Employee Retention Tax Credit updates.
See Important 2024 Employee Retention Tax Credit Deadline Information at the Bottom of This Article.
Employee Retention Credit Taxable Income
When the ERC return is issued, it is not taxable, but the rules for cost refusal apply to earnings that are equivalent to the amount of the ERC. A taxpayer’s wage deduction must be reduced by the amount of the ERC relevant to their tax year. As a result, a taxpayer is prevented from “double-dipping” and claiming a deduction and a credit for the same wage expenditure.
It is important to note that taxpayers may still deduct their appropriate Social Security and Medicare tax contributions.
Employee Retention Credit Taxable Income in 2021
According to IRC Section 280C, ERC cannot be considered taxable income. Therefore, there is a decrease in the payments that is just about the same as a credit amount. This decrease happens in the year that the wages were paid; therefore, even if the refund hasn’t arrived yet, a 2021 credit must be included on the 2021 tax return.
A taxpayer must have already spent or acquired the wages necessary to qualify for any applicable ERC at the end of the tax year and, presumably, the required knowledge to calculate the ERC‘s amount reasonably accurately. The wage expense disallowed must be applied in the year to which the ERC claim pertains, not when the ERC claim is submitted or when the funds are received.
A taxpayer may file an updated payroll tax return in a future tax year. In these situations, the taxpayer must modify their prior year’s income tax return to reflect the disallowed wage deduction during partial shutdowns.
What is Considered Income for Employee Retention Credit?
Eligible wages can be considered as income for ERC. All salaries and health insurance benefits are given to an employee when the employer is regarded as a qualified business and are covered by the ERTC for small employers. Earnings and health insurance benefits provided to an employee unable to perform work-related duties due to the pandemic are deemed fair wages under the ERTC for an eligible company that is not considered a small company.
Only when the company is regarded as an eligible employer may eligible wages be incurred. Therefore, in general, the company no longer has qualified earnings for the credit if they no longer fulfill the eligibility requirements having special rules.
Is ERC Refund Taxable Income?
The ERC is not taxable but subject to expense disallowance laws, which convert it into gross income. So if an employer got $200k in ERC during a period, it would be required to deduct $200k from its qualifying health plan expenditures and deductible salary expenses, exposing it to tax on an additional $200k income.
The eligible health plan expenditures paid for or incurred in 2020 and reimbursed by the ERC are subject to the expense reduction guidelines. In addition, no percentage of the ERC is subtracted from the employer’s deduction for its payment of Social Security and Medicare taxes.
The spending disallowance rules may also compel taxpayers to lower depreciation or basis for any capitalized wages or wages included in inventory using the complete absorption costing method, even though the IRS does not state this in the Notice or its published list of FAQs 1.280C-1 and 1.280C-3 of the Treasury Regulations Sections.
Read more about Employee Retention Credit IRS FAQs.
Employee Retention Tax Credit Updates
The IRS has addressed many unresolved concerns about employee retention credit, including how to use tips when determining qualifying earnings and whether COVID-19 relief funds should be included in gross receipts. Since the ERC was first passed in 2020, taxpayers have questioned what effect further COVID-19 relief may have on a company’s gross revenue. Employers might become eligible for the ERC in several ways.
- According to one technique, an employer’s “substantial drop in gross earnings” between the quarter for which qualifying is sought and the same quarter in 2019 must have occurred.
- To establish ERC eligibility, the IRS launched a unique safe-harbor rule in Revenue Procedure 2021-33 that permits taxpayers to deduct funds received through the COVID-19 relief programs mentioned above from the computation of “gross receipts.” Instead, according to the safe harbor, the sums are considered gross revenues for all other tax reasons.
- The guideline suggests that subsidies or loan forgiveness from any other program will remain to qualify as gross income for the ERC as it only refers to the three COVID-19 relief programs mentioned above.
Taxpayers weren’t sure whether government-provided COVID-19 relief amounts, such as loan forgiveness under the Payroll Protection Program (PPP), grants to operators of shuttered venues, and grants for restaurant revitalization, should be included in “gross receipts” when determining a “significant decline” until the IRS issued this guidance. Read full employee retention tax credit restaurants details here.
Check out this Comprehensive Guide on Employee Retention Tax Credit Updates.
How Does Employee Retention Credit Affect Tax Return?
Taxpayers may need to reflect an ERC on a return and raise taxable income before they get paid due to IRS processing delays for updated returns. Therefore, it may be helpful for firms to assess ERC eligibility fast. In addition, an increase in 2021 enables eligible firms to deduct up to 70% of up to $10k in salaries for each employee every quarter.
This raises the annual credit cap for each employee to a maximum of $28k in total. It is necessary to file an updated business income tax return or an Administrative Adjustment Request (AAR) for partnerships if the ERC was received in 2021 for 2020 quarters and the 2020 income tax return has already been submitted. The credit will not appear on the 2021 tax return.
How is Employee Retention Credit Reported on Tax Return?
Taxpayers that use the accrual method typically report income and deductions in the following ways:
- The circumstances that set the right to income or establish the taxpayer’s payment obligation have all taken place, and the amount can be estimated with acceptable precision.
- There is even another restriction in the case of a deduction. The all-events criteria are not deemed satisfied until the economic performance, often when services are rendered or when the property is utilized or given.
Cost disallowance, which is neither a deduction nor an item of income, is not cleanly covered by these rules. Following the CAA’s approval, taxpayers who received a PPP loan in 2020 and qualified for the 2020 ERC complied with all ERC 2020 conditions.
Learn more about: Can You Get Employee Retention Credit And PPP Loan.
Rules of IRC Section 280C
According to IRC Section 280C rules, no deduction shall be permitted for that part of wages or salaries paid or incurred for the taxable year equivalent to the total of the credits computed for the taxable year. Both financial statement and accrual basis taxpayers must comply with the regulations of IRC section 280C in this situation.
It could make sense for taxpayers to delay submitting their 2021 income tax return until any future claims for the 2021 ERC can be filed to lessen the workload for 2021 income tax filings. A taxpayer could have to pay the taxes payable due to the expenditure disallowance before they get money from the ERC refund, given the current IRS processing period for updated payroll tax forms.
What are Qualified Wages for the Employee Retention Credit?
Qualified wages are often those given to employees who are not delivering services because operations have been discontinued or owing to a drop in gross revenues, up to $10k per employee if a firm maintains more than 100 full-time staff in 2021. ERC credits are computed using the qualifying salaries given to workers when the employer was in an eligible employer status.
The refundable tax credits for most businesses using this program far outweigh the payroll taxes generated by the employers. As a result, ERC advantages can exceed the sums a company earns in PPP finance.
Learn more about 7 Ways to Determine Qualified Wages for the Employee Retention Credit.
Conclusion and Summary Related to Employee Retention Credit Taxable Income
For many firms, the Employee Retention Credit (ERC) has been a significant tax incentive in 2020 and 2021. Despite being a rather challenging credit, the ERC may be advantageous for many businesses with income tax purposes.
ERC taxable income is a complex system, but it’s important to understand the basics to make the most of the tax benefits available. Consult with a tax advisor to get specific advice for your business.
ERC PDF Download of This News Article
Download a PDF version of Everything You Need to Know About Employee Retention Credit Taxable Income
Receive Up to $26,000 Per Employee for Your Business: Claim the Employee Retention Tax Credit (ERC / ERTC)
Disaster Loan Advisors can assist your business with the complex and confusing Employee Retention Credit (ERC) and Employee Retention Tax Credit (ERTC) program.
Depending on eligibility, business owners and companies can receive up to $26,000 per employee based on the number of W2 employees you had on the payroll in 2020 and 2021.
The ERC / ERTC Program is a valuable tax credit you can claim. This is money you have already paid to the IRS in payroll taxes for your W2 employees.
Schedule Your Free Employee Retention Credit Consultation to see what amount of employee retention tax credit your company qualifies for.
ERC Deadline Urgency in 2024
April 15, 2024 Deadline for the 2020 ERC Tax Year
The deadline is coming up for the final opportunity to retroactively claim your business Employee Retention Credit for the past 2020 tax year. With the April 15, 2024 deadline fast approaching, we urge you; don’t let this final chance pass!
While not all businesses will qualify, as it depends on multiple factors per IRS Rules and Guidelines, you might be leaving significant financial relief on the table from prior COVID impact to your business during the past 2020 and 2021 business operation years.
Last year, in September 2023, the IRS temporarily paused processing ERC Claims for the remainder of last year. We at Disaster Loan Advisors (DLA) predicted this over one year ago when we made this ERC video warning business owners. See the ten-minute mark of the video for details.
TAKE ACTION NOW IN 2024
Even though the IRS has temporarily paused processing, you will still want to check eligibility and file now (if you qualify) because once the IRS will resume processing, ERC tax credit claims are processed in the order they are received.
If you haven’t previously filed for the ERC Credit, it is worth scheduling a phone call to at least explore your possible eligibility from both the past 2020 and 2021 business tax years. Contact us today for a deep-dive analysis to determine if your business qualifies one or more quarters from the 2020 and / or 2021 tax years.
Cover Image Credit: 123RF.com / Dolgachov / Disaster Loan Advisors.
As a leading dedicated member of the Tax and Accounting Team at Disaster Loan Advisors™, Mark focuses on unlocking the ERC Tax Credit's potential for eligible firms that qualify, providing strategic advice, and detailed guidance to ensure substantial financial recovery and growth. His methodical approach to client engagement includes comprehensive deep-dive analysis, customized consultation and guidance, and a commitment to achieving tangible results for each business served.
Disaster Loan Advisors™ (DLA) offers a comprehensive suite of services designed to navigate the complexities of the Employee Retention Tax Credit (ERC) program, ensuring that qualified businesses leverage the maximum possible benefit with minimum hassle. Unlike some firms that charge exorbitant contingency or percentage-based fees (often between 10% to 30% of your ERC refund), DLA operates on a fair and reasonable, transparent flat-fee structure that aligns with the IRS's guidelines.
If you are looking for an ERC Company that believes in providing professional ERC Services and value for small business owners, in exchange for a fair, reasonable, and ethical fee for the amount of work required, Disaster Loan Advisors™ is a good fit for you. STAY SAFE. STAY COMPLIANT. KEEP MORE OF YOUR REFUND.™