Are you a business owner wondering if Employee Retention Credits (ERC) are taxable income? If so, you’re not alone! The COVID-19 pandemic has caused many businesses to seek relief through the ERC. You need to know how this works and whether it is considered taxable income.
Fortunately, we can provide some insight on this complex issue. In this article, we will explain eligibility requirements for the ERC, how to calculate the credit, and whether or not it is considered taxable income. We will also discuss payroll tax considerations as well as retroactive application of the ERC and its impact on tax returns.
Finally, we’ll cover payroll deduction reduction related to ERCs. So let’s get started!
Overview
With the pandemic wreaking havoc on businesses, the ERC has been a lifesaver – offering relief in the form of a dollar-for-dollar rebate on income taxes.
There are two ways to establish eligibility for this credit: either through experiencing a substantial decline in gross receipts or by having operations fully or partially suspended due to governmental orders.
The amount of rebate received depends on how many employees were kept on the payroll and can be up to $5,000 per employee for 2020 and $7,000 per quarter for each employee kept in 2021.
Although it’s not taxable income itself, employers must reduce their payroll expense deduction by the amount of the credit; otherwise, they risk ‘double dipping’ which could affect their taxes.
If applying retroactively using Form 941-X, employers may need to amend their tax return if they’ve already submitted it.
In any case, understanding and filing correctly for these credits is essential in order to ensure that businesses receive all available relief from the government during these uncertain economic times.
Eligibility Requirements
Eligibility for the ERC involves either being subject to a government order to suspend operations or having suffered a significant drop in gross receipts, with businesses able to receive up to $26,000 per eligible employee.
To qualify for the credit in 2020, a business must show that its gross receipts declined by at least 50 percent compared to the same quarter 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.
Businesses may also be eligible if they experienced a full or partial suspension due to governmental orders related to COVID-19.
The amount of relief available is based on how many employees were kept on payroll during 2020 and 2021: employers can receive up to $5,000 per employee who was retained during 2020 and an additional $7,000 per quarter for each employee kept on payroll for each of the first three quarters of 2021.
This brings the total potential tax credit up to $26,000 per eligible employee.
Calculating the Credit
You can calculate how much relief you’ll receive with the ERC by figuring out how many employees you kept on your payroll in 2020 and 2021.
The amount of relief depends on the number of employees, and it’s a dollar-for-dollar rebate on your business income taxes.
In 2020, businesses can receive up to $5,000 per employee who was kept on the payroll throughout the year.
For 2021, 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.
That comes to a total of $21,000 for 2021 per eligible employee.
If an employee was kept on the payroll both years, businesses could receive a total tax credit of up to $26,000 per eligible employee.
However, remember that this credit will reduce any deductible expenses related to payroll taxes because taxpayers cannot ‘double dip’ when claiming deductions or credits from taxes owed.
Payroll Tax Considerations
Struggling to stay afloat? Don’t worry, the ERC is here to help you make it through!
The good news is that your ERC refund is not taxable income, so you don’t have to worry about any additional taxes. However, it will affect your payroll deductions.
When a business receives the ERC credit, they must reduce their payroll expense deduction by the amount of the credit – this ensures double dipping does occur.
If a business was applying for the ERC retroactively using IRS Form 941-X and has already submitted their income taxes for that year, then they may need to amend their income tax return in order to adjust the payroll deduction accordingly.
This means businesses should be aware of how much they can receive and adjust their deductions accordingly so as to avoid overpaying or underpaying taxes.
Retroactive Application
If you’ve already filed your taxes but want to apply for the ERC retroactively, you’ll need to adjust your payroll deductions accordingly – so don’t miss out on this great opportunity!
If you choose to take advantage of the employee retention credit after filing your taxes, you will need to file an amended return using Form 941-X. This form is used to make adjustments in payroll tax liabilities and can help reduce a business’s overall payroll tax liability.
When submitting this form, be sure to include all relevant information such as employee wages paid, amount of the ERC claimed, total wages subject to FICA tax, and any other applicable information. You may also have to provide additional supporting documentation depending upon your situation.
Be sure that you are aware of all applicable rules and regulations when filing an amended return with Form 941-X so that your business can maximize its potential savings from the ERC program.
Impact on Tax Returns
Maximizing your savings with the ERC program means adjusting your payroll deductions, so don’t miss out on this great opportunity!
If you are applying for the ERC retroactively using IRS Form 941-X and have already submitted your income taxes for that year, you may need to amend your income tax return to adjust the payroll deduction.
You must reduce your payroll expense deduction by the amount of the credit in order to avoid ‘double dipping’ according to IRS regulations.
It’s important to note that any refund from the ERC is not considered taxable income. However, since it affects what payroll deductions can be claimed, you should take into account this adjustment when filing your taxes.
Be sure to follow all applicable guidelines and consult a professional if necessary in order to get the most out of this program.
Payroll Deduction Reduction
You must adjust your payroll deductions to make sure you’re taking full advantage of the ERC program, so don’t miss out on this great opportunity!
When a business receives the ERC, they are required to reduce their payroll deduction by the amount of the credit. This is done in order to prevent businesses from receiving a double benefit, or “double dip”.
Therefore, if you’re eligible for an Employee Retention Credit refund and have already submitted your income tax return for that year without adjusting your payroll deduction, you may need to amend it in order to take full advantage of the credit.
Make sure to take into account these three important points when claiming the credit:
- You should always use IRS Form 941-X when filing retroactively for an ERC refund.
- You must reduce your payroll deductions by the amount of the credit.
- If applicable, you may need to amend your income tax return in order to adjust for any changes due to claiming an ERC refund.
Conclusion
It’s important to know whether or not the ERC is considered taxable income. Generally, the credits are not taxable and can be claimed as a refundable credit against payroll taxes.
However, if you retroactively apply for the ERC or reduce your payroll deductions due to the credit, this could have an impact on your tax returns.
It’s best to speak with a qualified tax professional to ensure you are taking advantage of all potential benefits and avoiding any potential pitfalls associated with the ERC. You want to make sure you’re getting every penny of relief that is available to you!
