Is ERC Taxable Income? How To Claim ERC On Your Taxes
Yes, you can still claim the employee retention credit on your taxes! Read this guide to find out how.
On 11/14/23, IRS Commissioner Daniel Werfel announced that the IRS is updating its ERC review procedures and will begin processing new ERC claims in the near future following the moratorium implemented in September. Existing claims are still being processed and eligible businesses can still submit an ERC claim through reputable ERC specialists to be processed when the moratorium ends. Visit our full breakdown of the ERC pause for the latest information.
Are you among the thousands of small business owners that haven’t taken advantage of the employee retention tax credit? The good news is that you may still be eligible to receive a refund, and this post will show you how to claim the employee retention credit.
If you missed out during 2020 and 2021, you can still claim the employee retention credit on your taxes.
Keep reading for details on qualifying for the ERC, calculating your credit, how to file an amended tax return, and whether or not ERC is taxable income.
How To Claim The Employee Retention Credit: Quick Overview
Small business owners eligible to receive the employee retention credit claimed this tax credit on IRS Form 941, Employer’s Quarterly Federal Tax Return. However, some small business owners overlooked this important credit and didn’t claim it when submitting Form 941 to the IRS. Fortunately, eligible small business owners can retroactively claim this credit and receive a refund check by amending their quarterly tax returns using Form 941-X.
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Do I Qualify For The Employee Retention Credit?
Small businesses that were impacted by the COVID-19 pandemic may be eligible to receive the employee retention credit. To qualify for the ERC, you must meet one of the following requirements for any quarter for which you are claiming the credit:
- Your business was required to fully or partially suspend operations as a result of a government order, OR
- Your business had a significant decline in gross receipts
Additionally, your business must have paid qualified wages to employees. Here are the general guidelines about what counts as qualified wages for the ERC:
- Wages and compensation subject to FICA taxes
- Certain qualified health expenses
- Wages paid after March 12, 2020, through December 21, 2021
- Wages that were not used to qualify for a Paycheck Protection Program (PPP) loan
- Wages that were not used or will not be used to qualify for PPP loan forgiveness
One last thing to note is that wages that were paid to relatives of majority owners are not eligible for ERC.
Can I Still Claim The Employee Retention Credit?
If you didn’t claim your ERC on your quarterly tax return, you’re in luck.
Eligible small business owners can retroactively claim the tax credit and receive it in the form of a refund check from the IRS. In order to receive your ERC, you must submit an amended quarterly return to the IRS (more on this a little later). Make sure that you complete and submit your forms by the deadlines in order to receive your refund.
- For filing year 2020, amended returns to claim your credit are due on April 15, 2024.
- For filing year 2021, amended returns are due on April 15, 2025.
How To Claim The ERC On Your Taxes
In order to claim the ERC on your taxes now, you will need to file an amended return with the IRS. Here’s how to claim your tax credit in four easy steps.
Step 1: Gather Your Important Documents
Before you claim your employee retention credit, make sure that you’re prepared with the important documentation and information you need to calculate and claim your credit accurately. Here’s what you’ll need to get started:
- Personal information, including your Employer Identification Number and trade name
- Payroll records to calculate your ERC
- Copies of Form 941 filed for each quarter you plan to claim your ERC
- Prior years’ tax returns
- New copies of Form 941-X to file your amended quarterly returns
Step 2: Calculate Your Employee Retention Credit
Calculating the ERC can be a bit difficult, but the task is made much easier if you have all of your records and documentation.
To calculate your ERC for 2020, you can claim 50% of qualified wages up to $10,000 paid to each employee, with a maximum cap of $5,000 per employee.
The rules changed for claiming the ERC in 2021. Eligible small business owners can claim up to 70% of qualified wages up to $10,000 paid to each employee per quarter. This means that a small business owner can claim up to $7,000 per quarter per employee, with a maximum cap of $21,000 per employee in 2021. Recovery startup businesses may also be eligible to claim ERC for wages paid in 2021 Q4. Learn more in our step-by-step guide on how to calculate your ERC credit.
Step 3: Fill Out & File Form 941-X
To retroactively claim the ERC, you will need to file an amended quarterly tax return. This is done by using Form 941-X. Using this form, you will enter information about your business and calculations determining the amount of your ERC. Once completed, you will submit Form 941-X to the IRS by mail.
One last thing to remember is that a new Form 941-X is required for each quarter for which you plan to claim the credit. For example, if you plan to claim the credit for Q1 and Q2 in 2021, you’ll need to complete and submit two separate forms to the IRS. Learn how to fill out form 941-X properly and submit it to the IRS.
Step 4: Receive Your Employee Retention Tax Credit Refund
Once you’ve submitted your 941-X through mail to the IRS, your employee retention tax credit refund will begin processing. Unfortunately, this isn’t a short process, and it could take 12 months or longer to receive your refund. Once processed, the IRS will mail your refund check to your address on file. If, during the process, you have any questions about the status of your ERC refund, you can contact the IRS by phone.
Is ERC Taxable Income?
The ERC is a refundable tax credit, and it is not added to your gross income when you file your federal income tax return.
But even though your ERC refund is not added to your gross income, it will still impact your taxable income. This is because it will reduce the deduction you write off for wages and salaries. In other words, while you won’t add your ERC refund amount to your gross income, your taxable income will be higher since your wages and salaries deduction is reduced.
Sound confusing? As with all things taxes, it certainly can be. Here’s a quick example to break down how it works.
- Business A paid $200,000 in wages in 2020. Business A received an ERC refund of $50,000 for these wages.
- Business B paid $200,000 in wages in 2020. Business B did not receive an ERC refund.
- On its federal income tax return, Business A will subtract the ERC refund amount from wages paid. The result is that Business A will only be able to deduct $150,000 for wages and salaries.
- On its federal income tax return, Business B will be able to deduct $200,000 for wages and salaries.
In this example, if both companies had the same income and expenses, Business A will have a higher taxable income due to the reduced deduction.
Tax returns for business owners can be confusing — add in things like ERC and PPP, and it can seem downright impossible. This is why it’s always a good idea to consult with a CPA, tax preparer, or another financial expert when it comes to filing your taxes.
How To Record The ERC In Financial Statements
When you claim your refund, you’ll need to record the ERC in your financial statements. Accounting software can make this task much easier.
While you wait for your ERC refund, you’ll debit the Income Tax Receivable account in your software and credit the Income Tax Payable account. After the refund is received, you’ll debit the Cash account and credit the Income Tax Receivable account.
If you’ve already received your ERC refund, you can debit the Cash account and credit the Income Tax Expense account
If you’re unsure of what to do or the books aren’t balancing at any point in the process, consult with a CPA or tax expert.
Are There Other Ways To Claim The ERC?
Calculating the ERC and filling out Form 941-X can be overwhelming for many small business owners. Fortunately, it isn’t the only way to claim your employee retention credit refund.
An accountant or tax professional can determine if you qualify for the ERC and can help you complete and submit your forms for your refund. There are also lenders, tax services, and other companies that offer ERC refund services. These professionals will calculate your ERC and submit all forms to the IRS in exchange for a fee. However, the IRS has warned of ERC scams, so make sure that you work with a reputable company if you opt to hire a pro to claim your ERC.