Is the ERTC Considered Taxable Income? 

 December 13, 2023

By  Jace W Campbell, CPA

ERTC Considered Taxable Income

The Employee Retention Credit (ERTC) has been a topic of interest for many business owners, especially in the light of the COVID-19 pandemic. This federal initiative was designed to incentivize employers to keep workers on their payroll during periods of financial hardship…

But, one primary question that arises among business owners is – is the employee retention credit taxable income? Let’s dive into this question and unravel its various aspects.

What is the Employee Retention Credit (ERTC)?

The Employee Retention Credit, or ERTC, is a provision that was established under the CARES Act in 2020. The purpose of this credit was to provide relief to businesses that were financially impacted by COVID-19…

It operates as a fully refundable tax credit for employers, equal to 50% of qualified wages (including allocable health plan expenses) that eligible employers paid to their employees. This applies only up to $10,000 per employee for all quarters.

How Confident Are You In Your ERTC Eligibility?

Watch Our Video Explaining the Fraud We’ve Seen From National ERC Promoters

Is Employee Retention Credit Taxable Income?

So here’s what you need to know – Is the employee retention credit taxable income? Well, it’s not as simple as a ‘yes’ or ‘no’…

The IRS states that any form of federal financial assistance received by a business must be included in gross income unless it’s specifically excluded by law. However, certain exclusions do apply and they can significantly affect how ERTC impacts your taxes.

How does it impact Federal Taxes?

According to IRS guidelines, ERTC does not need to be included in gross income for federal tax purposes…

This means that while you’re required to report these credits on your federal tax return, they won’t increase your federal taxable income. This is because the CARES Act explicitly excludes ERTC from gross income.

What about State Taxes?

On a state level, the taxability of ERTC is not so clear cut…

Some states follow the federal guidelines, excluding ERTC from gross income. However, others may require it to be included in gross income for state tax purposes. It’s advisable to check with your state’s taxation department or a tax professional for precise information.

Also read: Can Individual Taxpayers Claim the Employee Retention Credit if They Kept Working?

How Does One Qualify for the ERTC?

Before we proceed to discuss eligibility, it’s important to understand the qualifying period for the Employee Retention Tax Credit. This essentially refers to the specific dates when a business meets one of two criteria: a significant decline in gross receipts, or a full or partial suspension of operations due to COVID-19-related governmental orders…

More precisely, if your business experienced a substantial dip in gross receipts for a given quarter, then all wages and health insurance premiums paid throughout that entire quarter are considered. This period will constitute your qualifying period for ERTC.

Conversely, if your business qualified due to full or partial suspension of operations, then you only qualify for those dates when the governmental order was in effect and caused more than nominal impact… As soon as either of these conditions ceases to be true – that is, the order is lifted or your operations are no longer significantly affected – your qualifying period ends.

But who exactly can qualify for this credit? An employer is eligible if their business was either fully or partially suspended due to orders from a governmental authority related to COVID-19… Or they experienced a significant decline in gross receipts during a calendar quarter when compared with 2019 figures.

It’s worth noting here that there’s another essential aspect many businesses inquire about – Can you claim ERTC if you received Paycheck Protection Program (PPP) loans? Well, originally under the CARES Act, employers were made to choose between receiving PPP loans or claiming ERTC. They couldn’t do both…

However, with subsequent changes introduced by the Consolidated Appropriations Act in December 2020 and later by the American Rescue Plan Act in March 2021, this rule has changed. Now businesses can indeed claim both PPP and ERTC benefits.

Nevertheless, it’s important to remember that you cannot “double-dip” – meaning you can’t use the same wages to calculate both PPP loan forgiveness and the ERTC. Hence, careful planning is necessary to maximize the benefits from both programs.

In conclusion, while navigating these intricacies can seem daunting, it’s worthwhile to remember that comprehensive understanding of these rules can open up substantial financial relief opportunities for businesses. Therefore, careful examination and understanding of your eligibility and qualifying period for ERTC becomes paramount.

Deceptive Practices Around ERTC

In the realm of ERTC, like any other government aid program, there exists certain deceptive practices. Some firms may use misleading tactics to entice businesses to sign up for their services…

Such firms might promise guaranteed results without providing a full picture of the potential risks and complications involved. Always remember that no matter who assists you with these claims, you are ultimately responsible.

Also read: Employee Retention Credit 2020 vs 2021

Why Choose JWC ERTC Advisory?

Finally, amidst this landscape filled with confusion and uncertainty around employee retention credit taxable income, choosing a reliable advisor like JWC ERTC Advisory becomes crucial…

Our team not only helps you navigate through these complex processes but also provides an independent eligibility review. We stand apart from other ERC firms by ensuring transparency, accuracy, and compliance in our services.

To conclude – yes, ERTC can be taxable under certain circumstances. But more than knowing whether it is taxable or not, understanding its complexities and navigating them efficiently is what really matters. And that’s where we can help you make a difference.

Jace W Campbell, CPA

Jace founded JWC ERTC Advisory CPA in March 2021 as the nation's first and only public accounting firm focused solely on ERC . . . and nothing else. He has personally signed over 9,000 ERTC claims and is proud to be executing these claims conservatively, and how intended by Congress.

He has a passion for educating clients so they can make the best decision for themselves.  If you read articles and watch videos that Jace produced in 2021, his approach is the same now as it was then.

While other firms pivot their messaging to comply with new IRS guidance, Jace continues preaching the same conservative principles that have helped clients recover hundreds of millions . . . while sleeping easy at night.

related posts:

Can You Claim Employee Retention Credit in 2023?

Can You Claim the Employee Retention Credit in 2022?

Employee Retention Credit Scams: What You Need to Know

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