Does the Employee Retention Credit Count as Income?

Small employers receive greater benefits under the Employee Retention Credit (ERC) regime. Specifically, for as long as they are an eligible employer, they can include wages paid to all employees. Large employers can only include salaries paid to employees for not providing services. Technically, yes, the ERC counts as income, but only salaries that meet the requirements are paid while the mandates are in effect and have a more than nominal impact on the company.

Instead, the employer must reduce wage deductions on their income tax return for the tax year in which they are an eligible employer for the purposes of the ERC. 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 the ERC calculation, PPP funds only apply to eight to ten weeks of wage expenses. ERC eligibility periods are longer. PPP loans can also finance non-wage expenses. No, but, if possible, allocate the maximum allowable non-wage costs to the waiver of the PPP. It is likely that sister holding companies of a fund can be treated as separate operations or businesses when considering the status of an eligible employer, since the Fund owned by the holding companies is not an active operation or business (rather a passive investment vehicle).

The entities that belong to a brand are independently owned and are not responsible for the services provided by any other entity that provides services under that brand. Our use of terms such as “our firm” and “we” denote an alternative practice structure. The ERC is a valuable tax credit you can apply for to keep your employees on the payroll during the COVID-19 pandemic. Although it 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. If you were in business when COVID-19 began, you may be eligible for the Employee Retention Credit (ERC). Introduced in the Coronavirus Aid, Relief and Economic Security Act (CARES Act), this credit offers a payroll tax credit for salaries and health insurance that were paid to employees during that time.

Since it is a payroll tax credit and not an income tax credit, you can still receive an ERC credit even if you didn't pay any income tax in the year you qualified. ERC credits are calculated based on qualifying wages paid to employees during their status as an eligible employer.

Zachary Kadner
Zachary Kadner

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