Is ERC Taxable?

Around 62.8% of companies with employees received some kind of financial assistance in 2020.

The Covid-19 pandemic had a huge impact on businesses all over the world, with many struggling to stay afloat. Government orders meant that many businesses couldn’t operate as normal, resulting in huge financial losses. ERC funds were one of the many solutions that the government initiated to help businesses survive.

Many people don’t fully understand ERC, however. One of the biggest questions business owners are asking is “is the ERC taxable?” If you’re wondering this too, keep reading for the answer.

What Is the ERC?

ERC (Employee Retention Credit) was signed into law in early 2020 as part of the CARES Act. It came about as a result of the Covid-19 economic stimulus program, and at the time, businesses needed to choose between ERC and PPP (Payment Protection Program).

While it’s considered a “tax credit,” businesses can receive it as a cash payment. There’s no limit to the amount a business can receive, or how the money is spent. The program was originally only supposed to apply to 2020 but was extended to 2021 (Q1, Q2, and Q3 only – eliminated for Q4) by the ARPA (American Rescue Plan Act).

Is the ERC Taxable?

The ERC is considered a refundable tax credit, rather than a tax. As such, ERC isn’t included in the gross income of a business in terms of federal income taxes.

When it comes to claiming deductions on wages and salaries expenses, however, the ERC does have an effect. It reduces the amount your business can claim depending on how much it qualifies for. Your taxable income will increase by however much credit you receive.

For example, if your business paid out $200,000 in wages and received $50,000 through the ERC in 2020, you could submit a payroll tax return reporting $150,000 in qualifying wages instead of $200,000.

How Do Businesses Qualify?

One of the main criteria for ERC is that a business can only apply if it was partially or fully shut down during the Covid-19 pandemic due to government orders. The following criteria were also put in place:

For 2020:

  • Must have an average of fewer than 100 full-time employees in 2019 (unlimited part-time employees)
  • Sales for a given quarter must be down by 50% when compared to the same quarter in 2019

For 2021:

  • Must have an average of fewer than 500 full-time employees in 2019 (unlimited part-time employees)
  • Sales for a given quarter must be down by 20% when compared to the same quarter in 2019

Anyone who is self-employed is ineligible for ERC. Businesses that are eligible need to issue W-2s and file Form 941s.

Recovery Startup Business

People are less aware of this, but newer businesses may also be able to claim ERC. This is something that a business will only be eligible for if it started after 02/15/2020. Note that a business that was opened before this date but purchased after it isn’t eligible.

It also needs to meet the following criteria:

  • An average of less than $1 million in gross receipts
  • 1 or more employees paid during Q3 and Q4

An eligible business can receive up to $7,000 per employee for each quarter with a cap of $50,000 per quarter for Q3 of 2021.

Claiming the ERC

You’re no longer wondering “is the ERC taxable?”, and may now be in a position to apply for it. ERC Opportunities is helping businesses all over the US apply for the ERC, and we’re the only ERC processor that provides advanced funding.

If your company is eligible, click here to get started with your application today.