Do You Have to Pay Income Tax on ERC Funds?

So your business just received an enormous sum of money through the ERC program. Hooray! You’re probably already thinking about what you can do with your ERC funds — give your employees bonuses? Build out your employee benefits program? Launch a new product? Get rid of your business debt? You have so many excellent options.

But hang on a minute. You need to make sure you’re getting all the money you think you are. Tax season is coming, and you don’t want to get into more debt just because you didn’t know your obligations.

While ERC isn’t taxable, it is subject to cost disallowance laws that effectively make it taxable. We’ll clarify the rules below.

DOES THE ERC COUNT TOWARD YOUR INCOME FOR FEDERAL TAXES?

No, you do not need to include any part of the employee retention credit in gross income for federal income tax purposes. That’s true of ERC funds received for any qualified wages, including allocable qualified health plan expenses. The Employee Retention Credit (ERC) is a refundable tax credit not considered taxable income. It is designed to encourage businesses to keep employees on their payroll. The credit is not a loan or a source of business income, so employers are not required to pay taxes on it.

You don’t need to include either part of the credit – the part that reduces your applicable employment taxes or the refundable part of the credit — in your gross income.

DOES THE ERC REDUCE EXPENSES YOU COULD OTHERWISE DEDUCT?

Yes, your employee retention credit funds can reduce the expenses you would otherwise deduct on your federal income tax return. That’s why we recommend waiting to use your funds until after you’ve talked to your CPA or tax preparer.

Under Section 2301(e) of the CARES Act, you are generally not allowed deductions for the portion of wages you paid that is equal to the ERC funds you received for the taxable year. In other words, your aggregate deductions will be reduced by the amount of credit you receive.

WHAT TO DO AFTER YOU RECEIVE YOUR ERC FUNDS

When you get your ERC, the first thing you should do is talk to your CPA or tax preparer. They can process the associated income tax returns and let you know how much additional money you’re actually netting.

Every company has a different tax situation, so we can’t give general advice on how your ERC will affect your taxes. ERC funds are not taxed as gross income, but they do reduce your payroll expenses. That reduction could impact your tax obligations.

We always recommend that you wait to spend your ERC until after you’ve received it, heard back from your tax preparer, and know the final total. The IRS will pay out interest on top of the refund, so you may not know how much you’re going to get in advance.

NEED HELP GETTING THE ERC?

LG Resources helps businesses like yours maximize the employee retention credit. We can help you see if you qualify, learn how much you qualify for, and evaluate your claim to ensure you get as much as you’re eligible for.

Our tax specialists are dedicated to the ERC. You don’t need to be the guinea pig for your CPA — we’ve already done this for many other businesses. Our streamlined processes help you get faster results, which means faster funding. We even include audit protection.

Contact us today to get started on receiving your ERC.