Employee Retention Tax Credit (ERTC) is an incentive available to employers in the United States to retain their employees during and after the coronavirus pandemic. This program was created as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020.
Under this program, certain eligible employers can receive a tax credit for retaining their employees during the pandemic and for paying a portion of those employee’s wages. While the Employee Retention Tax Credit can be valuable to businesses hit hard by COVID-19, it is important to know whether or not this credit is taxable income.
In general, all amounts received from an ERTC are considered nontaxable income and shall not be included in gross income for federal tax purposes. This includes any amount of retained wages that are paid out as part of an ERTC program as well any applicable credits applied against required Social Security or Medicare taxes for each employee included in the program. It should also be noted that if these retained wages were paid directly by an employer instead of being paid out under an ERTC, they would generally be considered taxable income.
Lastly, it should be noted that while the ERTC itself is non-taxable income, similar incentives may still need to be added to gross taxable income depending on state or local laws. Therefore it’s important to thoroughly research your specific location’s regulations on Employee Retention Tax Credit before utilizing this benefit offered under CARES Act.
Overview of Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) was introduced by the government as a form of financial relief for businesses in response to the Coronavirus pandemic. This credit allows businesses to offset their payroll taxes and receive a refund of up to $5,000 per employee. However, there is a fair amount of confusion arising whether this is taxable income. Let’s get into the details.
The Employee Retention Tax Credit (ERTC) is a refundable federal income tax credit available to employers affected by the COVID-19 pandemic. The purpose of this credit is to help businesses keep employees on their payroll when they face reduced demand due to the Coronavirus.
To be eligible for the ERTC:
- Your business must have fully or partially suspended operations during 2021 due to COVID-19, or
- Your business has seen a significant decline in gross receipts of at least 20% as compared with last year’s gross receipts.
The ERTC is available on qualified wages that you paid after March 12, 2020 and before January 1, 2021. Qualified wages are capped at $10,000 per employee for all months from March 2020 through December 2020 and $10,000 per quarter from January 2021 through December 2021. The amount of the tax credit will be equal to 70 percent of qualified wages paid up to $10,000 for each employee for each quarter. In addition, employers eligible for this credit must also limit cash compensation during the same period unless it exceeds the defined threshold (generally $10 million in 2019).
Employers who qualify may claim this tax credit when they file their quarterly payroll returns with Form 941. This includes qualifying expenses incurred up until December 31, 2021 that would otherwise qualify for this tax credit even if not paid until 2022.
Maximum Credit Amounts
The Employee Retention Tax Credit (ERTC) is a tax incentive provided by the federal government to qualified employers impacted by the coronavirus (COVID-19) crisis. The ERTC is a refundable tax credit of 50% on up to $10,000 in wages per employee per quarter. To qualify for the ERTC, employers must meet certain criteria set forth by the Internal Revenue Service (IRS).
Maximum Credit Amounts:
- The maximum credit amount for each full-time employee and “part-time equivalent” employee is $5,000 per calendar quarter ($15,000 maximum during tax year 2021).
- The amount of Qualified Wages that is credited cannot exceed more than $10,000 per calendar quarter.
- The total amount of wages subject to qualification cannot exceed total wages paid within the calendar quarter.
- In addition, employers are eligible for a fully refundable Employee Retention Credit against payroll taxes in excess of all other credits and deductions available under Internal Revenue Code and state law.
- Employers of any size are eligible for this tax credit as long as they were in operation on March 12th, 2020 and can show that their operations have been financially impacted due to COVID-19 either from having full or partial suspension from business operations imposed by governmental order or from experiencing significant decline in gross receipts compared to the same prior year period.
Taxability of Employee Retention Tax Credit
Employee Retention Tax Credit (ERTC) is a federal tax incentive that provides a special tax credit for employers in order to encourage them to keep their employees on payroll and not lay them off during the economic downturn caused by the COVID-19 pandemic. While this credit is a great way for businesses to save money, it’s important to know whether or not the credit is taxable.
Let’s take a look at the taxability of the ERTC:
The IRS offers many deductions and credits for business owners to help reduce the amount of tax owed. One of those credits is the Employee Retention Tax Credit. This federal credit provides up to $5,000 for wages paid by businesses to their employees during periods of economic hardship due to the COVID-19 pandemic.
The coronavirus-related employee retention credit applies directly against an employer’s Social Security portion of employment taxes. To qualify, an employer must have had business operations suspended or quality reduced due to government orders related to COVID-19, or have a significant decline in gross receipts compared with the same quarter in 2019 (also known as an “economic hardship”). Eligible employers are allowed a refundable income tax credit that is equal to 50 percent of their qualified wages paid after March 12, 2020 and before January 1, 2021 up $10,000 per employee.
According to IRS rules, employers can benefit from both the employee retention tax credit and a payroll tax deferral but cannot claim both on the same wages at one time. Taxes due must be paid by April 30; any taxes still owed must be paid by December 31. The amount of credit received cannot exceed an employer’s current payroll taxes under these rules; any excess would have no use and must be returned. Employers cannot claim a loss from cancelling other payment obligations as part of claiming this credit; it must be reported only as income earned from wage payments issued in 2020.
Taxable vs. Non-Taxable Credits
The Employee Retention Tax Credit (ERTC) was enacted with the Coronavirus Aid, Relief and Economic Security Act to help offset the economic impact of COVID-19 on small businesses. The credit is available to employers whose operations have been suspended or have experienced significant declines in revenue due to COVID-19.
Generally speaking, business credits are considered non-taxable when received and are subtracted from the total tax liability of the recipient company. However, the ERTC program contains some special provisions that may vary depending on your specific situation.
Under most circumstances, the credit provided by this program is a refundable credit— meaning that if it exceeds a business’s tax liability for a given year, they will receive an additional income distribution from IRS after filing their returns. This means that businesses that receive this benefit may end up receiving taxable income to partially or completely offset any costs associated with using the ERTC.
Additionally, some states may consider ERRC credits state taxable income; check with your local taxing authorities for details on how your state handles these credits and deductions before utilizing them for any purpose. Even in cases where ERRC is not deemed taxable income at either the federal or state level, it will still reduce any other deductions taken from either level of taxes owed; resulting in higher overall taxation levels. Therefore, it is important to consider all possible outcomes before taking advantage of this valuable benefit from the CARES act.
How to Report Employee Retention Tax Credit
Employee Retention Tax Credit (ERTC) is a relief program implemented by the IRS to help businesses who are suffering due to the COVID-19 pandemic. Employers are eligible to claim this credit on their taxes, which in turn reduce their payroll tax liabilities. However, it is important to understand the process of reporting and claiming the ERTC, in order to ensure that the credit is properly recorded and utilized.
Form 941 is a quarterly tax return employers must file to report the Employee Retention Tax Credit (ERTC) they claimed for their eligible employees. Form 941 is used to report wages, taxes withheld and conditions regarding Unemployment Insurance (UI) benefits. Any ERTC taxable amounts that are due for an employer should be entered in the “Other Taxes” line on Form 941 as “ERTC” under the “Adjusted Employer’s Share of Social Security and Medicare Taxes from Form 940 Line 14“.
As an employer, you would list the total amount received from participating in ERTC on line 17 of your Form 941 and then would enter both the ERTC qualified wages amount and ERTC subtotal on lines 11a and 11b for tax periods 1st quarter 2021 through 4th quarter 2021. This will let you compare your net income before ERTC against what you receive after claiming it. The information entered should also be part of your annual records as proof that all taxes were properly paid by your business entity.
In addition to filing Form 941, employers are also required to submit a copy of their Form 8818 with their federal income tax return filing or they can include it when requesting an extension from IRS. The Form 8818 serves as a way for employers to provide detail about how they intend to use their Employee Retention Tax Credit funds including stating why it was necessary for them to make such a request in order for them to keep their employees employed during 2020 given the economic impacts resulting from Covid-19 pandemic.
Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees, is the form used to report payroll taxes for farmers and agricultural employers. As an agricultural employer, you will use Form 943 to report wages paid to employees, the taxes withheld from these wages, the amount of employer-paid Social Security and Medicare taxes paid on their behalf and any qualified Employee Retention Tax Credit that you reported as part of the wages.
The COVID-19 pandemic caused significant stress on employers who had to cut back on hours or even close down their operations completely. The Economic Aid Act provided a qualified Employee Retention Tax Credit which allowed eligible employers to receive up to $10,000 in relief for each employee for wages paid during 2020. This credit was capped at $5,000 per employee per quarter.
When reporting your qualified Employee Retention Tax Credit on Form 943 you must include the credit information in Part 4 of the form as instructed at Line 4d: “Qualified Employee Retention Credits Reported” under Box 20 “Other credits“. Any other forms related to this should accompany your Form 943 when filing with the IRS. Furthermore, if you pay more than $2,500 in Social Security and Medicare taxes during a year (including those paid by an employee or withheld from an employee’s wages) then use Schedule R instead of Part 6 of Form 943 when calculating these EMSUR payments due. Be sure to take into consideration any additional wage limits that apply when calculating your payroll tax liabilities and credits via Schedule R.
After completing all relevant parts and schedules of the form it’s important not forget up add copies of necessary accompanying Forms W-2 and 1099-MISC (if required.) Once complete then submit it along with applicable schedules/attachments via mail or electronically via e-file services like Freecycle Tax Platform.
After considering all the factors noted above, it is concluded that although employers may receive a tax benefit of up to $5,000 per employee through the Employee Retention Tax Credit, it is not considered taxable income. When filing taxes, employers must include any Employee Retention Tax Credit they receive on their business tax returns, but it will not be treated as taxable income.
Employers are still responsible for withholding taxes on any wages paid to employees. Additionally, employees are also still responsible for reporting their wages on their personal tax returns, and then must pay appropriate taxes as well.