Is the ERC Taxable Income?


The Employee Retention Credit (ERC) has been a lifeline for many businesses impacted by the COVID-19 pandemic. This tax credit has provided relief to thousands of businesses, but there is still some confusion about whether the ERC is taxable income. In this article, we will explore the tax implications of the ERC and provide clarity on this important topic.

Establishing Eligibility for the ERC

To qualify for the ERC, businesses must establish their eligibility in one of two ways. The first way is if the business was subject to a governmental order to fully or partially suspend operations. This could be an order issued at the federal, state, city, or local levels.

The second way to establish eligibility is by experiencing a substantial decline in gross receipts. In 2020, businesses must have had a decline in gross receipts of at least fifty percent compared to the same quarter(s) in 2019. In 2021, businesses can qualify if their gross receipts are 80 percent or less than their gross receipts for the same period in 2019.

How the ERC Affects Income Taxes

The ERC is not considered taxable income. Instead, it is a dollar-for-dollar rebate on a company's income taxes. If a business had minimal tax liability or owed no income tax in 2020 or 2021, the credit can still be applied toward the business's payroll taxes.

The amount of the credit depends on the number of employees kept on the payroll. In 2020, employers can receive up to $5,000 per employee. In 2021, businesses can receive up to $7,000 per quarter for each employee. This means that if an employee was kept on the payroll in both 2020 and 2021, the business could receive a total tax credit of up to $26,000 per eligible employee.

Accounting for the ERC

While the ERC is beneficial for most businesses, it can affect their financial statements for 2020 and 2021. Businesses should record the ERC as a credit to grant income and a debit to accounts receivable. If the ERC is received as an advance payment, businesses should credit the refundable advance liability and debit the cash.

It is important to include disclosures in the financial statements about the accounting method chosen for the ERC. This helps ensure compliance with IRS rules and regulations.

ERC and PPP Loans

Initially, businesses that received Paycheck Protection Program (PPP) loans were not eligible for the ERC. However, through the Consolidated Appropriations Act of 2021, eligible businesses that received a PPP loan can now apply for the ERC retroactively to 2020. It is important to note that the ERC cannot be claimed for employee wages paid with funds from a forgiven PPP loan.

Applying for the ERC

If a business has not yet applied for the ERC, there is still time to do so. The deadline to apply for all four quarters in 2020 is April 15, 2024, and for all quarters in 2021, the deadline is April 15, 2025. Businesses can claim the ERC by filing a Form 941-X for the relevant quarters.


The ERC has provided much-needed relief to businesses affected by the COVID-19 pandemic. It is important to understand that the ERC is not considered taxable income. If you are unsure about how to file for the ERC or need assistance with the application process, it is recommended to work with experienced tax professionals. They can guide you through the process and ensure the accuracy and completeness of your filing. Don't miss out on potential savings – schedule a meeting with a tax specialist now.


How Long Does It Take To Receive an Employee Retention Credit Refund?

The refund process for the ERC varies, but it typically takes the IRS between six to nine months to issue refunds. Smaller refunds generally process faster than larger refunds.

What Constitutes Qualifying Businesses Under the ERC?

Under the CARES Act of 2020, businesses may be eligible for the ERC if they had employees and operated a trade or business. This includes tax-exempt organizations. However, it does not apply to governments or their agencies and instrumentalities, with limited exceptions.

Does the ERC Include Medicare Taxes Paid?

Yes, the ERC applies to employment taxes such as withholding, FICA, and Medicare.

Can Recovery Startup Businesses Claim the ERC?

Yes, recovery startup businesses can claim the ERC for qualified wages paid after June 30, 2021, and before January 1, 2022. To be eligible, a recovery startup business must have started on or after February 15, 2020, have one or more W2 employees (excluding owner-operators or family members), and have annual gross income/receipts that do not exceed $1 million for the 2020 and 2021 tax years.By: Tom Kerr
Title: Is the ERC Taxable Income?
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Published Date: Wed, 02 Aug 2023 11:00:35 +0000

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