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Is the Employee Retention Tax Credit Taxable?

With tax season upon us, business owners are wondering if the Employee Retention Tax Credit (ERTC) is taxable. Like taxes, the ERTC process can be complicated and time-consuming. That is precisely why The Lake Law Firm is assisting eligible businesses in applying for this refundable tax credit. Not only are we filing on behalf of qualifying business owners, but we are also providing answers to their most burning ERTC questions. 

As a business owner, wading through complex taxes is difficult enough without figuring out what counts as taxable income and what does not. Many businesses are left asking, is the Employee Retention Tax Credit taxable? Let’s take a closer look to determine whether the ERTC is taxable. 

An Overview of the Employee Retention Tax Credit

Among the tremendous health and social impacts of COVID-19, the pandemic also ravaged businesses nationwide. With businesses rapidly deteriorating under financial stress, Congress introduced a bill to salvage the crumbling U.S. economy. Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020, creating the Employee Retention Tax Credit. 

The ERTC was initially a unique tax break to encourage struggling businesses to keep employees on the payroll. Through the ERTC, business owners could recover a refundable payroll tax credit equal to a portion of eligible wages. Businesses must have suffered a decline in revenue or been affected by governmental mandates to qualify for the ERTC. 

The Consolidated Appropriations Act (CAA) of December 2020 and the American Rescue Plan (ARP) of March 2021 modified and extended the ERTC. 

Currently, eligible businesses can retroactively claim the ERTC for wages paid to employees in 2020 and 2021. Business owners can earn up to $5,000 per employee for 2020 and up to $21,000 per employee in 2021. Overall, thanks to the updates and extensions, business owners can claim up to $26,000 per eligible W-2 employee. 

Despite the clear positives of the ERTC, a surprising number of businesses have yet to claim their credits. Many business owners don’t understand the specifics of the ERTC or even how to apply for it. Some fear ERTC scams that will harm their business rather than benefit it. Misinformation and confusion regarding the ERTC have discouraged businesses from pursuing this refund. One of the most common ERTC questions we receive from business owners is: is the Employee Retention Tax Credit taxable? 

Is the Employee Retention Tax Credit Taxable?

To answer whether the Employee Retention Tax Credit is taxable, we must first understand what the ERTC is. 

Unlike the Payroll Protection Program (PPP), the ERTC is not a loan. Instead, it is a refundable tax credit. Initially, qualifying businesses could claim the ERTC as a tax credit to offset their taxes owed. It was treated as a reduction of the business owner’s federal tax liability. If the amount of the ERTC exceeded the business owner’s tax liability, the excess credit was refundable, meaning the business owner would receive a refund for the difference. For example, if a business is eligible for a $10,000 ERTC and owes $8,000 in federal taxes, it would receive a $2,000 refund. 

Technically, the ERTC ended on September 30, 2021. Luckily, businesses can still retroactively claim the tax credit in 2023 as a refund. The refund is a payroll tax credit, not an income tax credit, according to IRC 280C. 

Your ERTC refund may or may not be taxable. The ERTC refund can reduce the payroll wages or salaries businesses can claim as a deduction in their income tax return by the amount received. The reduced payroll expenses could increase the businesses’ net income, which might be taxable.

Consult Your Tax Professional  

Is the Employee Retention Tax Credit taxable? Again, your ERTC refund may or may not be taxable. The ERC will affect what payroll deductions you can claim. Businesses that receive the ERC must reduce their payroll expense deduction by the amount of the credit. This is so that a taxpayer cannot “double dip.”

If a business is applying for the ERC retroactively using IRS Form 941x, and they’ve already submitted their income taxes for that year, the business may need to amend their income tax return to adjust the payroll deduction in these circumstances.

The situation is tricky, and your state’s tax laws can factor into how the ERTC relates to your taxes. Federal income tax laws do not require employers to include the tax credit they receive for qualified wages in their gross income. Yet, your ERTC refund can still play a role in how you file your taxes or amend your income tax return.

It is best to speak with a tax professional about whether the Employee Retention Tax Credit is taxable in your particular case. A tax professional can provide sound advice on whether the ERTC is taxable in your case. They know both federal and state tax laws and can help you avoid potential tax pitfalls.

The Lake Law Firm Makes Filing for the ERTC Simple and Safe

The Lake Law Firm recognizes that many business owners are concerned about applying for the Employee Retention Tax Credit. That is why our attorneys and ERTC advisors make the process a breeze. We understand you have a business to run, so we handle everything, from determining your eligibility to filling out complicated IRS tax forms. 

Our unique position as a law firm sets us apart from accounting firms and other ERTC services. The attorneys and ERTC advisors ensure your claim is accurate and legal to maximize your refund while avoiding an IRS audit. In the event of an audit, we will defend you at no added cost. 

It only takes about 20 minutes to determine your ERTC eligibility, so contact us today for a free ERTC case evaluation at (888) 525-3529.

CORRECTION: ERTC may or may not be taxable.