Is the Employee Retention Credit Taxable?

Employee Retention Credit

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Getting paid for keeping employees on payroll? Sounds like some sort of utopia. Or maybe it’s just a tax incentive for business owners during the pandemic called the employee retention credit.

What is the Employee Retention Credit?

The employee retention credit (ERC) is a tax credit established under the CARES Act in 2020 as a companion to the Paycheck Protection Program to provide a refundable employment tax credit to help businesses with the cost of keeping staff employed. The tax credit can be as high as $5,000 per employee in 2020 and as high as $21,000 per employee in 2021.

To qualify for the tax credit, employers had to have their business fully or partially suspended by government order due to COVID-19 or have experienced significant declines in quarterly gross receipts.

So if the ERC has been around for two years now, why bring it up in 2022? Well, you can still claim the credits from 2020 and 2021 if you haven’t already done so. Additionally, it is important to properly reflect the credit amounts on your 2021 tax filings.

Is the ERC Taxable?

The ERC is a payroll tax, which means it’s not included in gross income. The credit itself, however, is subject to the “expense disallowance rules,” which applies to the wages used to calculate the credit. Therefore, for federal tax purposes, the ERC is considered taxable income.

On the state level, New York State has not published guidance on whether the ERC is considered taxable but it’s likely to be considered not considered taxable on the state level. The Sasserath & Co. team has had correspondence with multiple NYS revenue agents who have told us to treat this as not taxable on the state level.  

Professional Guidance

Need to apply for the ERC for wages paid to employees in 2020 and 2021? Not sure which amended forms to fill out to receive the tax credits? Confused on the taxable nature of the ERC you received? We understand the rules and regulations surrounding the employee retention credit can seem confusing. Please contact your Sasserath & Co. professional for guidance.

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