Employee Retention Tax Credit: Don’t Forget Taxable Interest Income
The Employee Retention Tax Credit (ERTC) is a major relief to employers navigating the business challenges brought on by the COVID-19 pandemic – but as we look ahead to the 2023 tax season, there are some important tax elements to keep in mind.
The ongoing credit program, which can be pursued for eligible employers for tax years 2020 and 2021 for retaining employees, could result in potential credits of up to $5,000 per employee in the calendar year 2020 and $21,000 per employee in the calendar year 2021. If your organization experienced either a gross receipts decline or more than a nominal portion of your business was suspended in 2020 or 2021 because of a government order, you may qualify. Find out if your business or organization could qualify as an eligible employer here.
Two major tax aspects
There are two major tax aspects that need to be dealt with for ERTC: wage disallowance as an expense, and interest income, which are handled separately.
Wage disallowance for tax purposes
The employee wages used to claim ERTC are disallowed as an expense on the business income tax return in the year the wages were paid, not when the refund/credit (money) was received. For example, if a business received an Employee Retention Tax Credit related to tax year 2020, they would need to amend their 2020 income tax return to reflect this, regardless of when the refunds were received.
In addition to paying out the refund amount requested, the IRS adds interest to the refunds for the time value of money. Regardless of when the ERTC refunds are received, while the wage disallowance must be reflected on the income tax return for the year the credit is related to, interest is a different story.
In general, when taxpayers have their ERTC refunds issued by the IRS, they receive Notice CP210 in the mail indicating their refunds can be expected to be sent in the next few weeks. Page 2 of this notice generally states exactly what amount of the refund to be received is associated with interest. This interest amount is considered taxable income in the year received.
For example, if a taxpayer received a refund check in December 2022 for $103,000 for tax year 2020 ERTC and the notice indicates $3,000 of the amount being paid out is interest, the $3,000 must be picked up as interest income on the 2022 business income tax return. Consequently, if the refund check was received in January 2023, the $3,000 would be picked up as interest income on the 2023 business income tax return.
What to do next
It is recommended that taxpayers hold onto all notices sent from the IRS related to the Employee Retention Tax Credit program. Provide these notices to your tax preparer in order to reconcile the refunds vs. what was originally submitted and to properly reflect any tax considerations.
If you have questions about the ERTC qualification process or questions on the tax aspect, contact us to connect with one of our top ERTC pros today. We’re here to help!