Employee retention tax credits were initially established in 2020 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide financial relief to businesses affected by the coronavirus pandemic. These are tax incentives to employers intended to encourage them to keep staff on their payrolls during the COVID-19 crisis. The American Rescue Plan of 2021 has extended these employee retention credits until June 30, 2021. Many employers are taking advantage of this tool, but they need to understand whether or not their employee retention tax credits are taxable. In this guide, we’ll discuss exactly what qualified employee retention taxes are, when they’re considered taxable income, and how employers must handle them come tax time.
First of all, employee retention taxes are a type of employer credit that is available to qualifying businesses that suffered economic hardship due to the coronavirus pandemic. Eligible employers can receive up to $7,000 per employee in credits based on their wages and health plan expenses during a qualifying period between March 13, 2020 and June 30, 2021. The purpose of these credits is for employers to retain staff even if their business was suffering financially due to the pandemic.
Secondly, it is important for employers to note that the income from employee retention tax credits may be considered taxable income depending on when they take advantage of them. Employers may be subject to taxes on any amount that exceeds $5 million in total wages and poses no limit on health plan expenses paid during the year 2022 or any future years after 2022 if they decide not use these employer credits before 2022.
What is an Employee Retention Tax Credit?
The Employee Retention Tax Credit is a refundable tax credit that employers may be eligible for if they have experienced financial hardship due to the COVID-19 pandemic. This credit is intended to help employers keep their workers on their payrolls and provide an incentive for rehiring employees who had been laid off or placed on furlough due to economic circumstances resulting from the COVID-19 pandemic.
Employers can claim the employee retention tax credit against their employment taxes (up to the full amount of these taxes) if they have experienced a “significant decline in gross receipts” compared to 2019, as follows:
- At least a 20% decline in gross receipts during either March 13, 2020 – June 30, 2020 or any other consecutive three-month period between June 30, 2020 and December 31, 2020 compared to the same calendar quarter in 2019; OR
- A full or partial shutdown that was mandated by government orders related to COVID-19 that forced or required them to reduce or suspend operations during any consecutive three months period between March 13, 2020 and December 31, 2020.
Eligible employers must also maintain an average number of “full time equivalent employees” throughout the same calendar quarter in which there was a significant decline in gross receipts (or mandatory shutdown) compared to the same calendar quarter in 2019. The eligible employer must also have employed all “qualified wages” (as defined under Section 3307(a) of the Internal Revenue Code) incurred after March 12, 2020 and before January 1, 2021.
In general, payments eligible for this tax credit are excluded from taxable wages up to $10,000 per employee ($5,000 for each 3 month period). Payments received over this threshold are subject to regular income taxes plus social security and Medicare withholding rules.
How Does the Employee Retention Tax Credit Work?
The Employee Retention Tax Credit (ERTC), created as part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides employers with a potentially substantial tax credit for wages paid to employees who are furloughed or whose hours are reduced due to the coronavirus pandemic. The ERTC is designed for businesses that have either partially or entirely suspended operations due to COVID-19, or at least experienced a significant revenue decline in 2020 as compared to 2019.
Here’s how it works: Eligible employers can claim a tax credit of 50 percent of qualified wages up to $10,000 per employee, over the course of 2020. The full amount is subject to certain limitations. Resulting tax credits can be claimed on quarterly employment tax returns and offset payroll taxes more immediately by filing Form 7200.
Each eligible employer can apply for refunds every quarter that total no more than $5,000 per employee ($10,000 limit over the year). If you are eligible for refunds in subsequent quarters but cannot collect the full $5,000 per employee this quarter due to insufficient payroll taxes options exist whereby some credit could be refunded earlier on your quarterly return yet the remaining balance applied against 2021 IRS Form 941 deposits when those become available once next year rolls around. Keep in mind that if you later decide not to claim any credit(s) related to such wages during this applicable quarter then you can refile your quarterly return without penalty prior 31 days before expiration date in order for them not to be subject when calculated against your 2021 941 deposits with regard to reaching maximum cap allowable before said refund application is processed by IRS using Form 7200 as previously noted above as an alternate measure used for payroll tax offsetting
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Are Employee Retention Tax Credits Taxable?
Employee Retention Tax Credits (ERTC) are a form of government incentive to help employers retain their employees during the Covid-19 pandemic. The credits provided are typically tax-free, and businesses can claim them once they have met certain criteria. However, there is some debate over whether or not the credits are actually taxable.
Let’s take a look at the pros and cons of this issue:
Employee Retention Tax Credits are credits provided by the federal government to employers that have experienced a significant financial hardship due to the pandemic. These credits can be used to cover a number of expenses, such as wages and benefits, of qualifying business owners and their employees. However, these credits are not exempt from taxes.
The Internal Revenue Service (IRS) has stated that the Employee Retention Tax Credit is a type of taxable income which must be reported on an employer’s tax return. Therefore, any portion of the earnings which qualifies for this credit must be reported as income and subject to taxation. But keep in mind that businesses may still be eligible for other credits or deductions in relation to this credit if applicable.
Depending on how much tax credit an employer receives, there could also be potential implications for their net income and taxable payroll taxes. It’s important to consult with a tax specialist or professional who can advise you further on how best to handle this type of credit when filing your business taxes each year. They can help you determine if additional deductions apply or assist you in properly reporting this type of taxable income so you can maximize your refund or minimize your tax liability when filing taxes at the end of each fiscal year.
The Employee Retention Tax Credit (ERTC) was designed to provide financial assistance to businesses and organizations affected by the coronavirus pandemic. Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), employers may qualify for a refundable tax credit for up to 50 percent of qualified wages paid between March 13, 2020 and December 31, 2020.
This tax credit is used to financially support employers who are facing difficult times during the pandemic. It helps to offset some of the costs associated with employee wages. While you may be eligible for this tax credit, it’s important to understand how it works and whether or not it’s considered taxable income.
Generally speaking, it’s important to note that any sort of non-taxable income is not subject to taxes and will not increase your taxable gross income. Non-taxable income includes things like gifts, Social Security benefits, and certain types of government assistance programs like ERTC payments. In other words, while you do get paid this money upfront or as part of a tax refund check following the end of your qualifying period in December, you won’t be taxed on this money when filing your taxes in 2021.
Since ERTC payments are considered non-taxable income under most circumstances*, they should not add any additional taxes when filing your annual return in 2021 (or any other year). However, if you have any questions about your specific situation, it’s always a good idea to seek out professional advice from an experienced CPA or an experienced tax attorney who can help clarify how this incentive might impact your bottom line come April 15th next year.
In conclusion, it is important to understand that all Employee Retention Tax Credits are taxable. Employers must include the amount of tax credits received in the taxable income for the year in which it was earned and the tax credit must be claimed in the same year. To accurately report and claim employee retention credits, employers should be familiar with their local rules and regulations related to taxes.
Any employer who takes advantage of the Employee Retention Tax Credit should be sure to document their usage and keep accurate records in order to receive any applicable associated tax refunds or deductions. As positions become available, employers should remain vigilant in hiring those who may have been displaced due to Covid-19 lay-offs or other business shutdowns. Doing so ensures that employees obtain gainful employment while preserving their financial health during this difficult time.