The CARES Act, passed in March 2020 in response to the COVID-19 pandemic, established the Employee Retention Credit (ERTC) to help businesses retain their employees and provide financial relief. The ERTC allows eligible employers to claim a credit against their employment taxes equal to 50% of the qualified wages paid to their employees.
But, as with any tax credit or refund, it’s important to consider whether or not the ERTC is taxable.
According to the IRS, the ERTC is not considered taxable income for the employer or the employee. This means that the credit is not subject to federal income tax, and it does not need to be reported on the employer’s or employee’s tax return.
Additionally, the ERTC is not considered taxable income for the purposes of calculating Social Security and Medicare taxes. This means that the credit will not be subject to the additional 0.9% Medicare tax on wages over a certain threshold, nor will it be subject to the 6.2% Social Security tax.
However, it’s important to note that the ERTC is considered a tax credit, not a tax deduction. This means that the credit is applied directly to the employer’s employment tax liability, reducing the amount of taxes they owe. It does not reduce the amount of taxable income for the employer or the employee.
In summary, the ERTC is not considered taxable income for the employer or the employee, and it is not subject to Social Security and Medicare taxes. It is a tax credit that reduces the employer’s employment tax liability. It’s important for businesses to understand the tax implications of the ERTC in order to properly claim the credit and receive the financial relief provided by the CARES Act.