Tax Treatment of Employee Retention Credit | Employee Retention Credit Tax Treatment

Tax Treatment of Employee Retention Credit | Employee Retention Credit Tax Treatment

The Employee Retention Credit, or ERC, has offered relief to tens of thousands of businesses that were impacted by the pandemic. Businesses have been able to qualify for credit by establishing their eligibility in one of two ways. The first way to establish eligibility is if the company was subject to a governmental order to fully or partially suspend operations.

This can be a governmental order issued at the federal, state, city, or local levels. The other way to establish eligibility is if your business experienced a substantial decline in gross receipts in 2020 and/or 2021.

To be eligible for the ERC in 2020, a business must have a decline in gross receipts of at least fifty percent compared to the same quarter(s) in 2019. For 2021, companies can qualify if their gross receipts of at least twenty percent compared to the same quarter(s) in 2019.

The amount employers can recoup through the tax credit depends on how many employees were kept on the payroll. Employers can receive up to $5,000 per employee kept on the payroll in 2020. Businesses can receive up to $7,000 per quarter for each employee who was kept on the payroll for each of the first three quarters of 2021. This comes to a total of $21,000 for 2021. Therefore, if an employee was kept on the payroll in 2020 and 2021, the business could receive a total tax credit of up to $26,000 per eligible employee.

Is the ERC Considered Taxable Income?

The good news is that your ERC Refund may or may not be taxable income, depending on the option chosen below. The ERC refund will affect what payroll deductions you claimed on the filed 2020 and 2021 returns. Businesses that receive the ERC must reduce their payroll expense deduction by the amount of the credit for the year(s) received. This is so that a taxpayer cannot "double dip.

If a business is now applying for the ERC retroactively using IRS Form 941-X, and they've already submitted their income taxes for that year(s), the company may need to amend their income tax return(s) to adjust the payroll deduction in these circumstances. If this is done, the refund will not be taxable, however, the taxpayer will be required to amend the return (2020 or 2021 or both) for which the original payroll expenses (payroll and employers portion of Social Security and Medicare) were deduction. This reduction in expenses will likely case an increase in taxes either for the company or the taxpayer.

If the business chooses not to amend the 2020 or 2021 business returns for the payroll tax deduction previously taken, then the refund would be taxable in the year received.

Note: If the business chooses to amend the previous year's returns, depending on how the entity is taxed, it may affect the owners' personal return(s).

We Can Help!

If you are unsure how to file for the ERC or need assistance preparing and submitting your application, we recommend working with one of our experienced tax professionals. Our tax specialists at Legacy Tax & Resolution Services can guide you through the process. We can also answer any questions you may have along the way so that you can feel confident about the accuracy and completeness of your filing. With our help, you can feel confident about your employment disallowance and your company's reporting accuracy. Don't miss out on potential savings – schedule a meeting with a tax specialist now.

Deadline for 2020: April 15, 2024