ERTC payment from IRS - is it taxable income?

ac-control · ‎April 17, 2023

Should ERTC payments be considered as taxable income? If so, under what category? If not, then under what category?

Rainflurry · ‎April 19, 2023

Below is an excerpt from IRS Notice 2021-49. It is clear that the qualified wages used to claim the ERTC become a disallowed deduction and amending returns is required.

Under section III.L. of Notice 2021-20, a reduction in the amount of the deduction allowed for qualified wages, including qualified health plan expenses, caused by receipt of the employee retention credit occurs for the tax year in which the qualified wages were paid or incurred. When a taxpayer claims the employee retention credit because of the retroactive amendment of section 2301 of the CARES Act by section 206(c) of the Relief Act (relating to eligibility of PPP borrowers to claim the employee retention credit) or otherwise files an adjusted employment tax return to claim the employee retention credit, the taxpayer should file an amended federal income tax return or administrative adjustment request (AAR), if applicable, for the taxable year in which the qualified wages were paid or incurred to correct any overstated deduction taken with respect to those same wages on the original federal tax return.

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Rustler · ‎April 19, 2023

No it is not taxable income for the RIS filing, your state may feel differently

Rainflurry · ‎April 19, 2023

@ac-control& @Rustler

The ERTC is taxable at the federal level because the wages that gave rise to the credit now become a disallowed deduction. Therefore, you will need to amend your tax returns for the year(s) that you deducted those wages.

ac-control · ‎April 19, 2023

Hello Rustler and Rainflurry,

Thank you both for your answers. It seems that one answer indicates that it is non-taxable income and another indicates that yes it is. I am certain that you both have a strong understanding of tax code. Because of these conflicting answers, would you kindly provide some reference or additional information to support your answer? Thank you.

Rainflurry · ‎April 19, 2023

@ac-control

Below is an excerpt from IRS Notice 2021-49. It is clear that the qualified wages used to claim the ERTC become a disallowed deduction and amending returns is required.

Under section III.L. of Notice 2021-20, a reduction in the amount of the deduction allowed for qualified wages, including qualified health plan expenses, caused by receipt of the employee retention credit occurs for the tax year in which the qualified wages were paid or incurred. When a taxpayer claims the employee retention credit because of the retroactive amendment of section 2301 of the CARES Act by section 206(c) of the Relief Act (relating to eligibility of PPP borrowers to claim the employee retention credit) or otherwise files an adjusted employment tax return to claim the employee retention credit, the taxpayer should file an amended federal income tax return or administrative adjustment request (AAR), if applicable, for the taxable year in which the qualified wages were paid or incurred to correct any overstated deduction taken with respect to those same wages on the original federal tax return.

ac-control · ‎January 16, 2024

Hello @Rainflurry

Thank you for this very clear information.

Follow up questions:

1. How should I register in my Chart of Accounts the checks received from the IRS?

That is, if I receive 4 checks, $10,000 each for 4 different quarters, what category should I register this in QBO? It is not income, then should I apply it to payroll tax liabilities?

2. Should I make a journal entry in the tax year and tax quarter of QBO? That is, if one of the checks is for Q2, 2020, then should the journal entry be in that quarter and should that $10,000 check be accounted for that journal entry?

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ERTC payment from IRS - is it taxable income?