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Is ERC Taxable Income?

The ERC tax credit was established to help small businesses keep their staff employed during the COVID-19 lockdown, restrictions, and financial hardship that incurred from the pandemic during the tax years of 2020 and 2021. This refundable tax credit provides relief to small businesses expenditures used towards keeping employees on payroll while their business took a significant hit from the pandemic.

Form 1120 Department of Treasury Internal Revenue Service (IRS)

While the ERC tax credit itself is not taxable, it is still subject to cost disallowance laws as noted through the IRS Notice 2021-49. In this notice, the IRS explained that employers must report all qualified wages as well as health insurance costs for these employees during applicable financial quarters.


What Is Expense Disallowance?


Under the Internal Revenue Code, there are certain expenses that are not allowed in the ERC tax credit. These expenses cannot be included in the calculation of what you may receive in your claim. Expenses that are not allowed are considered “disallowance taxes,” which covers things like wages paid to the family of the owner and wages paid to employees on leave.


Employers who file disallowance taxes under their application risk penalties and interest charges from the IRS.


Disallowed Business Interest Expense Examples


Say the owner of a restaurant hired their spouse and child to work in the restaurant. If they file for an ERC tax credit to recuperate wages paid to employees during 2020, they cannot include the wages paid to their spouse and child in that application filing. This is because the spouse and child are within the owners’ family and could be dependents for tax purposes.


In the same reasoning, the wage of a co-owner or partner for a business also does not qualify.


How ERC Impacts Income Tax Return


The Employee Retention Tax Credit aims to reduce the tax burden of businesses impacted by COVID-19 in 2020 and 2021 tax years. Employers claim the ERTC on their federal tax returns, typically through the Quarterly Federal Tax Return (Form 941).


This could save you from owing any taxes at all for that tax year, if the ERTC is more than the amount of taxes you owe. If that is the case, you could receive a refund for the rest of the ERTC amount from the IRS.


How to Report ERC on Tax Return 1120-S


When filing taxes, the ERTC amount should be reported on your Form 1120-S on Schedule K, line 13g. To ensure that you are filling out all tax return forms correctly, it is best to consult with a financial advisor. Filing tax returns incorrectly could result in penalties from the IRS.


Will the IRS Audit the ERC Tax Credit?


On October 19, 2022, the IRS notified employers to be wary of third parties promoting the ERC to companies that did not qualify to file a claim. For this reason, it is best to consult with ERC experts who have experience handling ERC claims. Experienced ERC consultants will ensure


It is important to report the ERC tax credit correctly when filing taxes and fill out your ERC application accurately. The IRS could audit any incorrect information from your ERC claim. To avoid the possibility of penalties or fines from the IRS, you should hire an ERC consultant to ensure that you are filling out everything correctly.


Making errors on your application could create unforeseen tax liabilities and consequences arising from providing inaccurate information.


Under the passage of the American Rescue Plan of 2021, Congress approved an extension for the IRS to audit ERC claims for five years as opposed to three. However, the IRS has already begun audits from ERC claims. To get your ERC credit application completed efficiently without error, it is best to consult with an expert. They can get you in line with the IRS faster without your application feeling rushed, which could result in serious consequences.


How an ERC Specialist Can Help the Application Process


ERC specialists are financial experts with experience helping businesses file their applications to receive the ERC tax credit. They have a full understanding of what you need for the application and can walk you through each step of the process. Handling tax credits can be tricky, and you want to avoid making any mistakes on your application that can lead to penalties or fines from the IRS.


An ERC consulting firm can also get you in line with the IRS faster to get your application approved. Getting approved gives you up to $21,000 per employee, so it’s best to be on the safe side and hire an experienced ERC consultant for your line of business.


The team at ERC Consulting Experts will work closely with you every step of the way. With over 22 years of tax experience, we have helped thousands resolve their IRS tax problems. You can feel confident with an A+ rating from the BBB along with our goal of always putting the interest of our clients first.


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