Is the Employee Retention Credit Considered Income?

The Employee Retention Credit (ERC) is a refundable tax credit available to employers affected by COVID-19 pandemic. Learn more about how it works and how it affects your taxable income.

Is the Employee Retention Credit Considered Income?

The Employee Retention Credit (ERC) is not a tax, but a refundable tax credit for the salaries of eligible employees. Small employers receive greater benefits under the ERC regime, as they can include wages paid to all employees for as long as they are an eligible employer. Large employers, however, can only include salaries paid to employees for not providing services. Technically, yes, the ERC is considered income, but only if the employer pays salaries that meet the requirements while the terms of office are in effect and have a more than nominal impact on the company.

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 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 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).The ERC refund is not taxable when it is received; however, salaries equal to the ERC amount are subject to expense dismissal rules.

This is so that a taxpayer cannot “pay twice” and receive a wage deduction and a credit for the same wage expense. Section 280C of the Internal Revenue Code (IRC) states that “no deduction shall be allowed for the part of wages or salaries paid or incurred during the tax year that is equal to the sum of the credits determined for the tax year.”Since the ERC is no longer available, the only way to apply for any credits you qualify for is to file an amended return using Form 941-X. This increases your taxable income by the amount of the credit during the period you qualified for the ERC. Churches and other religious organizations that were affected by capacity restrictions imposed by government for meetings or that experienced a significant decrease in their gross revenues are also eligible for this credit. From now on, filing an amended Form 941-X (Quarterly Federal Payroll Tax Return) is the only way to apply for it. FAQ 85 states that IRS code does not allow a deduction for wages paid equal to certain credits in a tax year.

The notice confirmed that tips received by employees counted as “qualified salaries” for employers to calculate credit amounts and that employers could request a tip credit from both the ERC and Federal Insurance Contributions Act (FICA) for the same tips. The ERC is a valuable tax credit you can apply for to keep your employees on payroll during COVID-19 pandemic. You don't enter any credit that reduces employment taxes applicable to employer, nor do you include refundable part of credit. Taxpayers should also note that denial of expenses related to ERC may affect their wage limit for purposes of qualified business income (QBI) deduction under section 199A. For more information on employee retention credit, visit Cherry Bekaert's ERC Guidance Center or contact Martin Karamon.

If you have any questions about ERC or its impact on you or your company, please contact GHJ's tax advisors.

Daniel Rickenbach
Daniel Rickenbach

Freelance music ninja. Hipster-friendly pop culture enthusiast. Passionate twitter practitioner. Devoted coffee fan. Wannabe student.

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