Are Employee Retention Credits Tax Deductible?

The employee retention credit (ERC) is a fully refundable tax credit that eligible employers can request to cover certain payroll taxes. It's not a loan and doesn't have to be repaid. Generally, the refundable credit exceeds the payroll taxes paid in a credit-generating period. The ERC is not a tax, but rather a refundable tax credit for the salaries of qualifying employees.

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 FICA for the same tips. Although ERC is not considered taxable income, under Section 280C of the Internal Revenue Code (IRC), tax credits for employers create a reduction in wages in the amount of the credit. While the refund is not taxable under article 280C of the IRC, the amount of the credit creates a reduction in salary that matches the amount of the credit. You don't enter the credit that reduces applicable labor taxes to the employer or include the refundable part of the credit.

The American Rescue Plan extends a number of critical tax benefits, in particular the employee retention credit and the paid leave credit, to small businesses. Under this law, companies are entitled to a tax credit equal to 100% of the paid sick leave and paid family leave offered to employees. Applying for the employee retention credit is easy and requires only a few simple steps to receive the refund. FAQ 86 states that employers who receive a tax credit for eligible wages and health care expenses do not include the credit in their gross income for federal income tax.

The employee retention credit under the CARES Act encourages companies to keep employees on their payroll.