Is the ERC Taxable Income?

The Employee Retention Credit, or ERC, has offered relief to tens of thousands of businesses that were impacted by the pandemic. Businesses have been able to qualify for the credit by establishing their eligibility in one of two ways. The first way to establish eligibility is if the business was subject to a governmental order to fully or partially suspend operations.

This can be a governmental order that was issued at the federal, state, city, or other local levels. The other way to establish eligibility is if your business experienced a substantial decline in gross receipts in 2020 and/or 2021.

To be eligible for the ERC in 2020, a business must have a decline in gross receipts of at least fifty percent compared to the same quarter(s) in 2019. For 2021, businesses can qualify if their gross receipts are 80 percent or less than their gross receipts for the same period in 2019. 

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The employee retention credit is not a loan or a tax deduction. Instead, it’s a dollar-for-dollar rebate on a company’s income taxes. If a business had a minimal tax liability or owed no income tax in 2020 or 2021, the credit can still be applied toward the business’s payroll taxes.  

The amount that employers can recoup through the tax credit depends on how many employees were kept on the payroll. Employers can receive up to $5,000 per employee who was kept on the payroll in 2020. Businesses can receive up to $7,000 per quarter for each employee who was kept on the payroll for each of the first three quarters of 2021. This comes to a total of $21,000 for 2021. Therefore, if an employee was kept on the payroll in 2020 and 2021, the business could receive a total tax credit of up to $26,000 per eligible employee.  

Is the ERC Considered Taxable Income? 

The good news is that your ERC refund is not taxable income. However, the ERC will affect what payroll deductions you can claim. Businesses that receive the ERC must reduce their payroll expense deduction by the amount of the credit. This is so that a taxpayer cannot “double dip.”  

If a business is applying for the ERC retroactively using IRS Form 941-X, and they’ve already submitted their income taxes for that year, the business may need to amend their income tax return to adjust the payroll deduction in these circumstances.  

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We Can Help! 

If you are unsure about how to file for the ERC or if you need assistance preparing and submitting your application in a timely manner, we recommend working with one of our experienced tax professionals. Here at Stenson Tamaddon, our tax specialists can guide you through the process. We can also answer any questions you may have along the way, so you can feel confident about the accuracy and completeness of your filing. With our help, you can feel confident about your employment disallowance and the accuracy of your company’s reporting. Don’t miss out on potential savings – schedule a meeting with a tax specialist now. 

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