Tax credits are a great way for employers to reduce their tax burden and save money. The employee retention credit (ERC) is one such credit that can be claimed by eligible employers. But is the ERC taxable? This article will provide an expert's guide to the employee retention credit and answer this question. The Internal Revenue Service (IRS) states that the ERC is not taxable. This means that the employer does not need to include the credit in their gross income for federal income tax purposes.
Neither the part of the credit that reduces employment taxes applicable to the employer nor the refundable part of the credit are included in the employer's gross income. However, employers must be careful to avoid a “double benefit” with respect to the ERC and other credits. For example, employers cannot use wages that were used to claim the ERC and declared by a third-party payer on behalf of the employer to request a $45 credit on their income tax return. Employers can choose not to apply for the ERC for any calendar quarter by not requesting it on their payroll tax return. The ERC is a refundable tax credit for salaries of eligible employees. While the refund is not taxable under article 280C of the Internal Revenue Code, it does create a reduction in salary that matches the amount of the credit.
If a third-party payer applies for the ERC on behalf of an employer, they must collect all necessary information from the employer to accurately apply for it. The IRS has also confirmed that tips received by employees are counted as “qualifying salaries” for employers to calculate credit amounts. Applying for the ERC is easy and requires only a few simple steps. Eligible employers must use the same definition of “qualifying wage” used by other eligible employers when calculating their ERC. If an employer uses an uncertified third-party payer to declare and pay its federal payroll taxes, they must declare the ERC on an aggregated Form 941 and separately declare it on an attached Annex R.Section 280C (a) of the Code generally does not allow a deduction for the portion of salary paid equal to certain credits determined for the tax year. Consequently, a similar denial of deduction would apply under the ERC, so that an employer's total deductions would be reduced by the amount of the credit. If an eligible employer is an estate or trust, then a related person includes the grantor, beneficiary or trustee of the estate or trust, or any person who maintains a relationship described above with a person who is the grantor, beneficiary, or trustee of the estate or trust. In conclusion, while employers can claim an employee retention credit, they must be aware of how it affects their taxes and deductions.
Employers should consult with their accountant or tax advisor before applying for any credits.