Are Refunds from Employee Retention Tax Credit Taxable?

Impact on the income tax return While the refund is not taxable under IRC § 280C, the amount of the credit creates a reduction in salary that matches the amount of the credit. Small employers receive greater benefits under the ERC regime. Specifically, for as long as they are an eligible employer, they can include wages paid to all employees. Large employers can only include salaries paid to employees for not providing services.

Technically, yes, but you only pay salaries that meet the requirements while the terms of office are in effect and have a more than nominal impact on the company. Instead, the employer must reduce wage deductions on their income tax return for the tax year in which they are an eligible employer for the purposes of the ERC. The Employee Retention Credit (ERC) is a fully refundable tax credit that eligible employers request to cover certain payroll taxes. It's not a loan and doesn't have to be repaid.

For most taxpayers, the refundable credit exceeds the payroll taxes paid in a credit-generating period. While an employer cannot include salaries financed by a Paycheck Protection Program (PPP) loan in the ERC calculation, PPP funds only apply to eight to ten weeks of wage expenses. ERC eligibility periods are longer. PPP loans can also finance non-wage expenses.

No, but, if possible, allocate the maximum allowable non-wage costs to the waiver of the PPP. It is likely that the fund's sister holding companies can be treated as separate operations or businesses when considering the status of an eligible employer, since the Fund owned by the holding companies is not an active operation or business (rather a passive investment vehicle). Cherry Bekaert LLP and Cherry Bekaert Advisory LLC practice in an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable laws, regulations and professional standards. Cherry Bekaert LLP is an independent, certified public accounting firm that provides certification services to its clients, and Cherry Bekaert Advisory LLC and its subsidiaries provide tax and business advisory services to their clients.

Cherry Bekaert Advisory LLC and its subsidiary entities are not authorized public accounting firms. The entities that belong to the Cherry Bekaert brand are independently owned and are not responsible for the services provided by any other entity that provides services under the Cherry Bekaert brand. Our use of the terms “our firm” and “we” and terms of similar meaning denote the alternative practice structure of Cherry Bekaert LLP and Cherry Bekaert Advisory LLC. If your company meets all requirements for eligibility, it must apply for credit as soon as possible to start the reimbursement process.

The ERC is a tax credit that is 100% refundable for companies that meet all requirements and can keep employees on payroll. No part of the ERC reduces an employer's deduction for their participation in Social Security and Medicare taxes. For most companies that take advantage of this program, refundable tax credits far exceed payroll taxes paid by employers. The refundable element of the credit, as well as any amount of credit that reduces relevant payroll taxes, are not included in an employer's gross income.

Keep in mind that refundable credits can only be used for profits that have not been forgiven or are not likely to be forgiven under PPP loans. ERC credits are calculated based on qualifying wages paid to employees during their status as an eligible employer. For more information on employee retention credits, visit Cherry Bekaert's ERC Guidance Center or contact Martin Karamon. If your company qualifies, you can apply for both FFCRA credits and Employee Retention Tax Credits (ERC) for your retirement plans.

The ERC is a fully refundable payroll tax credit, which means that although it is charged against payroll taxes, amount of ERC may exceed payroll taxes due. Businesses can still apply for ERC by filing an amended Form 941X (Quarterly Federal Payroll Tax Return) for quarters in which company was an eligible employer. Applicants continue to ask questions such as whether ERC funds are taxable and how entire tax process revolves around employee retention (tax credit).

Denise Lefler
Denise Lefler

Hardcore travel specialist. Extreme bacon lover. Freelance twitter lover. Certified coffee guru. General pizzaaholic. Certified web aficionado.