Do You Have to Claim the Employee Retention Credit as Income?

The ERC has provided substantial tax relief to employers during COVID-19. A common question is whether the credits companies receive are then taxed as income. The answer is no – the ERC does not become taxable income.

Overview of the ERC

First, a quick recap of the ERC:

  • Provides a credit of up to $7,000 per employee for 2021 quarters
  • Applies to qualified wages, health expenses, and retirement costs
  • Taken against payroll taxes and is refundable
  • Requires employers to show a 20% revenue decline

The credit has generated billions in relief across small and large employers.

Tax Treatment of the ERC

Despite the potential for sizable credit amounts, the ERC does not get added back as income. Key reasons:

It’s a Credit, Not a Deduction

Credits directly lower tax liability, while deductions lower taxable income. Credits therefore provide more tax savings.

No Taxable Income Recapture

The law enacting the ERC does not require any taxable income recapture for the credit amounts received.

Offsets Non-Income Taxes

The ERC offsets payroll taxes which are not based on income. No income tax effects result.

Refunds Not Considered Income

Any ERC refunds for credits exceeding payroll taxes are also not taxed as income.

Examples of Non-Taxable ERC

A few examples showing the ERC does not create taxable income:

  • Company X gets a $100,000 ERC refund. $0 taxable income results.
  • Company Y claims $200,000 of ERC just to lower payroll taxes. $0 taxable income.
  • Company Z’s ERC cuts payroll taxes by $250,000. Again, $0 income.

As illustrated, whether claimed against taxes or received as a refund, the ERC does not become taxable income.

Contrast With PPP Loans

Unlike ERC, forgiven Paycheck Protection Program loans do become taxable income. So PPP loan recipients must factor income tax on forgiveness amounts.

Conclusion

The ERC provides a twofold financial benefit – substantial credits plus no taxability on the amounts received. Companies can leverage ERC relief without any income tax reductions. Just another reason to maximize your eligible ERC amounts.

Reporting Requirements

While the ERC does not create taxable income, proper reporting is still required:

  • Form 941 – ERC amounts are calculated on the quarterly payroll tax return.
  • Form 3800 – The general business credit form schedules the ERC.
  • Form 5884-C – This new form added for the ERC contains additional required details.
  • Financial Statements – The credits should be shown in financial report footnotes.

Documenting the non-taxable ERC amounts on these required filings provides transparency on credits claimed.

Maximizing Non-Taxable Relief

Some tips to maximize ERC relief without income taxation:

  • Claim credits for multiple qualified quarters before expirations.
  • Include health insurance and retirement costs to increase qualified wages.
  • Keep wages under the $10K per employee cap each quarter.
  • Amend returns ASAP to recapture missed ERC from prior quarters.
  • Avoid any risk of IRS clawback by ensuring full compliance.

Interaction With PPP Loans

While ERC does not create taxable income, forgiven PPP loans do. Employers who have received both forms of relief must:

  • Document which wages apply to each program.
  • Only use wages for one program per employee per quarter.
  • Recognize taxable income on any forgiven PPP loan amounts.
  • Coordinate both programs carefully with advisors.

Getting Professional Help

Navigating ERC implementation, calculations, reporting, and coordination with PPP loans can be complex. Having an experienced CPA or tax attorney assist can help maximize COVID relief while ensuring full legal compliance and minimal tax burdens.

Frequently Asked Questions

Does the ERC create taxable income?

No, the ERC does not become taxable income, even if claimed as a refundable credit exceeding payroll tax liabilities.

How is the ERC reported?

Recipients should report ERC amounts claimed on Form 941, Form 3800 and new Form 5884-C. Financial reporting is also recommended.

Is a refund from the ERC considered taxable income?

No, ERC refunds for credits above payroll tax liabilities do not get added back as taxable income.

What types of taxes can the ERC offset?

The ERC can only offset employer payroll taxes, primarily Social Security tax. It does not apply to income taxes.

Is the ERC considered a loan or grant?

No, the ERC is a tax credit, not a loan or grant. Credits provide more tax benefits than deductions.

Are forgiven PPP loans taxed like the ERC?

No, unlike ERC, forgiven PPP loans do become taxable income that must be recognized.

Can wages generate both ERC and PPP loan forgiveness?

No, the same wages cannot be used for both programs per IRS rules. Double dipping is prohibited.

Who can provide guidance on the ERC?

CPAs, tax attorneys, and other qualified professionals can advise on maximizing and reporting ERC amounts.

Where can I learn more on ERC tax treatment?

IRS instructions, professional advisors, and program guidance provide details on the non-taxable nature of the ERC.

Resources on ERC Taxability

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