Does the Employee Retention Credit Count as Income?

The Internal Revenue Bulletin does not include these FAQs, so they cannot be used as a legal authority. An employer that receives a tax credit for qualified wages, including the attributable expenses of the qualified health plan, does not need to include the credit in their gross income for federal income tax purposes. Neither the part of the credit that reduces employment taxes applicable to the employer nor the refundable part of the credit are included in the employer's gross income. The client employer must take care to avoid a “double benefit” with respect to the Employee Retention Credit (ERC) and the credit under section 45S of the Internal Revenue Code.

The client employer cannot use the wages that were used to claim the ERC and declared by the third-party payer on behalf of the client employer to request the $45 credit on their income tax return. Any eligible employer can choose not to apply the Employee Retention Credit for any calendar quarter by not requesting the credit on their payroll tax return. Small employers receive greater benefits under the ERC regime, as they can include wages paid to all employees, while large employers can only include salaries paid to employees for not providing services. Technically, yes, but employers only pay salaries that meet certain requirements while terms of office are in effect and have a more than nominal impact on the company.

Instead, employers must reduce wage deductions on their income tax return for the tax year in which they are an eligible employer for ERC purposes. The ERC 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 their ERC calculation, PPP funds only apply to eight to ten weeks of wage expenses. ERC eligibility periods are longer and PPP loans can also finance non-wage expenses. No, but if possible, allocate the maximum allowable non-wage costs to PPP loan waivers. It is likely that sister holding companies of a fund can be treated as separate operations or businesses when considering ERC eligibility status, since the fund owned by these 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.

Employers with 100 or fewer full-time employees can use all salaries of employees who work, as well as any paid time they are not working, with the exception of paid vacation provided under Families First Coronavirus Response Act. The customer, employer and third-party payer will each be responsible for payroll taxes due as a result of any improper request for employee retention credits that are unduly requested in accordance with their liability under Internal Revenue Code and regulations applicable to payroll taxes declared in payroll tax return filed by third-party payer in which credit was requested. However, upon request from IRS, third-party payer must obtain from customer's employer and provide IRS with records that confirm customer's eligibility for employee retention credit. IRS has barriers to prevent wage increases from being factored into credit once employer is eligible for employee retention tax credit. If third-party payer applies for employee retention credit on behalf of client employer, they must collect from customer all information necessary to accurately apply for employee retention credit on behalf of their customer. If third-party payer applies for employee retention credit on behalf of client employer, they must at request of IRS be able to obtain from customer and provide IRS with records that prove customer's eligibility to receive employee retention credit.

Also remember that if customer has applied for PPP loan and will be forgiven for it, they may now be eligible for retention credit for employees with certain salaries. Consequently, similar denial of deduction would apply under employee retention credit so that employer's total deductions would be reduced by amount of credit as result of this denial rule. Although ERC is not considered taxable income, under Section 280C of Internal Revenue Code (IRC), tax credits for employers create reduction in wages in...