Is the Employee Retention Credit Considered Income



The Employee Retention Credit (ERC) is a tax incentive created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) intended to help employers retain employees during the pandemic. This credit is available to businesses who temporarily reduce operations or experience a significant decline in gross receipts due to the pandemic related closures and mandates. The ERC provides a refundable credit against federal payroll taxes of up to $5,000 for each employee retained during the taxable period if certain criteria are met.

The ERC has become an important tool for many businesses in providing help to their employees at this difficult time, but it is also important to know how this credit affects your business from a tax perspective. In particular, it is important to understand if and how the ERC affects gross income for your business.

This article will provide an overview of the basics of the ERC and discuss whether or not it is considered income for your business.

Overview of the Employee Retention Credit

The Employee Retention Credit (ERC) was introduced by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help businesses with their financial hardship during the pandemic. The ERC is a refundable payroll tax credit available to employers who retain their employees and pay them a certain amount of wages.

In this article, we will look at

  • what the ERC is,
  • who is eligible for it,
  • and answer the question – is the ERC considered income?

What is the Employee Retention Credit?

The Employee Retention Credit (ERC) is a refundable payroll tax credit established under the Coronavirus Aid, Relief and Economic Security (CARES) Act. The ERC is designed to reimburse employers for a portion of their Social Security payroll taxes on behalf of their employees for wages paid from March 13, 2020 through December 31, 2020. Specifically, eligible employers can receive a tax credit equal to 50% of certain qualified wages up to $5,000 per employee in any given quarter. Furthermore, employers may be able to obtain an advance payment of the tax credit at any time during the calendar year in which it was earned.

In order to be eligible and claim the full ERC benefit, employers must meet specific qualifications such as having more than one employee and experiencing either a significant decline in gross receipts or starting after February 15 and before June 30, 2020. In addition, there are restrictions on how much of the ERC can be claimed depending on whether an eligible employer received loan forgiveness under the Paycheck Protection Program (PPP). So it’s important to carefully consider your specific situation when determining how much you can claim.

Finally, all wages used as part of calculating an employer’s ERC must be considered taxable income for employees who receive them regardless whether or not you have claimed or received advance payment of the credit. This means that the wages should be reported on Form 1099 for non-employees and Form 941 with respect to employees who directly receive them from you during 2020.

Who is Eligible for the Employee Retention Credit?

The employee retention credit is designed to assist employers who were negatively impacted by the coronavirus pandemic with retaining employees on their payroll in 2020. This tax credit is available to most employers, regardless of size, who experienced a full or partial suspension of operations due to government orders during 2020 or had significant declines in gross receipts during one quarter in 2020 compared to the same quarter in 2019.

Eligible employers must meet several criteria to qualify for the employee retention credit, including:

  • Must have been in operation prior to February 15, 2020
  • Have 100 or fewer full-time employees
  • Suffered a full or partial suspension from an order issued by a governmental entity limiting commerce, travel or group meetings due to certain events related to COVID-19
  • Experienced a decline in gross receipts of 50% or more when comparing the third and fourth quarters of 2020 from the same period in 2019.

How Does the Employee Retention Credit Work?

The Employee Retention Credit is designed to incentivize employers who have suffered from the economic effects of the COVID-19 pandemic to retain their employees. The credit is a refundable tax credit that can be taken by eligible employers against certain employment taxes during 2020.

Eligible employers are those experiencing either:

  • a full or partial suspension of their operations during any quarter of 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings; or
  • a significant decline in gross receipts during a calendar quarter relative to a prior quarter in 2020.

Employers must continuously have employed at least one employee during both each quarter and the preceding calendar year (2019). Furthermore, the same employee must be paid at least $10,000 in wages over the two quarters combined. Eligible employers may claim a tax credit up to 50 percent of qualifying wages up to $10,000 per employee for wages paid after March 12, 2020 and before January 1, 2021. Wages are considered qualified if they cover health insurance costs for current employees and guaranteed paid sick leave due to COVID-19 related reasons. Qualifying wages do not include family and medical leave credits provided by section 45S before April 1st, 2020 or payments received under certain leave provisions provided by the Families First Coronavirus Response Act Payroll Tax Credits section 7001.

This credit is claimed on Form 941 along with normally filed taxes for Social Security and Medicare withholdings paid on behalf of each employee for each quarter of 2020 for which eligible employers are claiming the credit. The taxpayer should retain payroll documentation showing amounts paid as well as an explanation of how the employer meets eligibility requirements.

Is the Employee Retention Credit Considered Income?

The employee retention credit (ERC) is a tax credit available for certain employers affected by the COVID-19 pandemic that allows for businesses to retain employees and receive a refundable tax credit. Under the CARES Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, eligible employers can claim the employee retention credit if they are experiencing a full or partial suspension of operations or a significant decline in gross receipts.

But is the employee retention credit considered income? Let’s dig deeper into the details:

Is the Employee Retention Credit Taxable?

The Employee Retention Credit (ERC) is a refundable payroll tax credit that was created to help employers cover the costs of wages and salaries paid to employees during the COVID pandemic. The ERC is designed to offset certain payroll expenses like wages, health benefits, and retirement contributions.

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, employers are eligible for a credit for up to 50% of qualified wages.

As an employer who has chosen to take advantage of the ERC, you may be wondering whether this credit is considered taxable income. The answer is that it depends on your situation. Generally speaking, if you receive a refundable tax credit (including the ERC) for more than you owe in taxes for the year in which you receive it, then it would be considered income and included as part of your total taxable income on your federal tax return.

However, if your employer takes advantage of the carryback option included in the CARES Act and applies this credit against payroll taxes paid in prior years, then it will not be considered taxable income by the IRS since no direct payments are made to employees or their employers. It’s important to note that any amount received in excess of what was owed in prior years will still be reportable but will not be included as part of taxable income on your federal return. Be sure to consult with a professional tax advisor when determining how best to allocate and report any excess credits within your business.

How is the Employee Retention Credit Reported on Tax Returns?

Employers who receive the Employee Retention Credit (ERC) must report it on their quarterly employment tax returns. The credit is reported by filing Form 941, Employer’s Quarterly Federal Tax Return, and claiming the applicable ERC on Line 16d. Every time the employee is paid wages for qualifying wages, an amount equal to the applicable ERC should be reported as a refundable employer credit on line 10c of Form 941.

The IRS has released Form 7200, Advance Payment of Employer Credits Due to COVID-19 for employers who need an advance of their expected credits. This form can also be used as an instruction sheet for reporting the holidays/payroll tax payment holiday or ERC.

The ERC should not be included in income but rather should be treated as a deduction to arrive at taxable income on Form 1120 or Form 1065 U.S. Return of Partnership Income filed with IRS Forms 940 & 941, Employers Annual Federal Unemployment Tax Returns and also shown in box 14 of IRS form W-2 Wage and Tax Statement and box 12a-L when calculating your net pay/paycheck during 2020.

When filing federal tax return Form 1040, these are listed as business deductions under Other Income section – Line 20a then enter code “RR” followed by amount to subtract from income. Reconciliation between reported Wages & Coronavirus relief payments will generally occur when employer files his federal tax return for year 2020.


In conclusion, the answer to the question of whether the Employee Retention Credit is considered income depends on how it is used. If used for wages or salaries that are earned in a given period and included in gross income, then it will be considered taxable income. However, if used for wages that were paid at a later date or as payments for ongoing services and not reported as gross income, then it will not be regarded as taxable income.

When in doubt, you should always check with your accountant or financial advisor so that you are in compliance with all local laws and regulations regarding taxation of such credits.