The Employee Retention Tax Credit (ERTC) was created by the CARES Act to provide financial relief to businesses affected by COVID-19. The credit is designed to encourage businesses to retain current employees during the pandemic and for several months after, regardless of their business size or industry. Businesses qualifying for the tax credit will receive a dollar-for-dollar reduction in taxes owed.
Although this tax break is attractive, there are some important considerations that must be taken into account when filing an ERTC claim. For example, employers must still comply with all applicable rules and regulations, including those set forth under the Internal Revenue Code. Additionally, understanding if the credit received is taxable as ordinary income can save employers from any unexpected taxes at the end of their fiscal year.
In this guide, we will discuss some key factors related to filing for ERTC and explain whether or not it is taxable as ordinary income. We will also provide guidelines on how business owners can apply for ERTC and what steps they should take after receiving this valuable tax credit:
- Understand the requirements for ERTC eligibility.
- Determine if the credit received is taxable as ordinary income.
- Learn how to apply for ERTC.
- Understand the steps to take after receiving the credit.
Overview of the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a tax credit designed to help employers keep their employees during the COVID-19 crisis. The ERTC provides employers with a refundable payroll tax credit of up to 70% of qualified wages paid from March 13, 2020 through December 31, 2021.
It is important to understand if the ERTC is taxable income and if so, how much. Let us look into this in more detail.
The Employee Retention Tax Credit (ERTC) was created as part of the Coronavirus Aid, Relief and Economic Security Act (CARES ACT). It is designed to help businesses who have been struggling financially due to the pandemic. The credit is available to employers who:
- Paid qualified wages after March 12, 2020
- Experienced partially or fully suspended operations as a result of a coronavirus governmental order, or had gross receipts in 2020 that were at least 50% lower than the same quarter in 2019
In addition, the ERTC is only available for employers whose gross receipts during any calendar quarter of 2019 was $4 million or less. The credit is equal to 50% of retainees’ qualified wages up to a total of $5,000 per employee per calendar quarter. Employers are eligible for the credit if they are able to reduce their federal employment tax deposits by the amount of their qualified wages and certain related health plan expenses.
The amount of the credit may be reduced if an employer participates in other state taxable wage subsidy programs such as those provided under North Carolina’s Shared Work Program. The reduction will be based on any subsidy that those employers receive and not solely on wages paid while participating in such programs. Additionally, wages used for calculating this credit cannot be used in determining employer eligibility for other credits such as worker opportunity tax credits or new hire retention credits under Internal Revenue Code sections 51 and 3111(f).
Maximum Amount of Credit
The maximum amount of credit any business can claim under the Employee Retention Tax Credit program is $5,000 per employee. The total credit available for a single employer is limited to $28 million in any calendar quarter. Any unused portion of the credit may be carried over to the next calendar quarter, but is not refundable. The amount of credit claimed must also be taken into account when calculating other tax credits.
If researchers or seasonal employees are paid an hourly rate that would result in earnings greater than $10,000 for the period covered by the ERTC calculation, those wages should be prorated to arrive at a maximum ERTC benefit amount of $5,000. This proration calculation must use actual hours or assign 8 hours a day, 5 days per week (40 hours) as long as it reflects no more than what was earned during that period and provides an accurate benefit estimate of $5,000 per employee.
Other Important Considerations
In addition to understanding the rules concerning qualification and amount of the Employee Retention Tax Credit, there are two ongoing issues to be aware of. Employers need to recognize that they cannot claim credit if they continue to receive aid through the Paycheck Protection Program or Disaster Loan Assistance, so it’s important to review your eligibility for both. Additionally, employers must keep in mind that although the Employee Retention Tax Credit is a refundable federal tax credit, it is subject to the Alternative Minimum Tax and the Social Security Wage Base Limitation.
Employers should also be aware that amounts paid as wages may not exceed taxable wages for any calendar quarter during a qualified year in order for all employees claiming the credit to remain eligible. When claiming, be sure to provide tax documentation and payroll records along with your business income tax returns for each qualified year as well as supporting documents since employers are required to retain proof of eligibility requirements for at least four years following submission of their return.
These are important things for employers to consider before deciding whether or not the Employee Retention Tax Credit is right fit for their needs.
Is the Employee Retention Tax Credit Taxable?
The Employee Retention Tax Credit (ERTC) was established to help businesses cover the costs of employing their staff during the COVID-19 pandemic. The ERTC provides a dollar for dollar credit for wages paid after March 12, 2020, up to a total of $5,000 per employee.
One of the key questions businesses have is whether or not the ERTC is taxable. In this article we will delve into this question and examine the tax implications of the ERTC.
Taxable or Non-Taxable?
The Employee Retention Tax Credit (ERTC) is a credit for wages and healthcare costs paid by businesses adversely affected by the coronavirus pandemic. The tax credit applies to eligible employers that are either fully or partially suspended due to a COVID-19 pandemic-related government shut down ordered by a government authority, or that had gross receipts in either 2020 or 2021 that declined by more than 50% compared to the comparable prior period. The maximum amount for each eligible employee is $5,000 per quarter in 2021 ($10,000 for the entire year).
So the question of whether or not this tax credit is taxable depends on how it was used. If an employer took advantage of ERTC credits used as deductions on their tax return and applied them directly against payroll taxes (Form 941) they would not be taxable to them. However, if an employer claimed ERTC as credits against their income tax liability (Form 1040), then this amount would be included as other income and taxed at their normal marginal rate on their returns. Therefore, it is important to note whether or not the ERTC credits have been claimed as income when filing your taxes.
What if the Credit Exceeds the Tax Liability?
The Employee Retention Tax Credit (ERTC) established by the Coronavirus Aid, Relief and Economic Security Act provides employers with a refundable tax credit equal to 50% of wages paid to employees affected by the COVID-19 pandemic in 2020. The ERTC is claimed on an employer’s quarterly Form 941 and is also allowed against certain other taxes reported on other forms. If a taxpayer’s eligible wages exceed its total payroll tax liability for any calendar quarter, the excess tax credit is refundable up to a maximum of $5,000 per employee.
Taxpayers whose employer retention credit exceeds their payroll tax obligation will receive either a reduced amount or no credits on their form 941 each quarter; however, taxpayers can still claim the full amount of the ERTC when filing their Annual Form 944 Employment Tax Return at year end if he/she has not taken full advantage of it throughout the calendar year. During this process it’s important to note that any portion of the ERTC that was taken earlier in the year as an advance will be limited from claiming it again at year end since you cannot double dip when taking out any sort of credit. As long as taxpayers meet all IRS requirements, they may be able to receive a partial or full refund at year end for their overpayment even though they did not initially receive those funds during each quarter’s filing period.
In conclusion, whether or not the Employee Retention Tax Credit is taxable will depend on the individual taxpayer and their circumstances. Generally, for regular income tax purposes, if the ERTC has been received as a refund of previously paid unemployment compensation from an employer, then it may not be taxable. However, if the ERTC has been received as a reimbursement from the government for employee wages paid to retain their employees in place before and during that year, then it may be taxable.
It is important that taxpayers consult with their personal tax advisors to confirm any applicable deductions based on individual circumstances and current tax law.