As businesses in California continue to navigate the various tax laws and regulations, one question that has recently come to the forefront is whether employers are required to pay taxes on the employee retention credit (ERC).
The ERC was established by the federal government as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide financial relief to businesses that were adversely affected by the COVID-19 pandemic. The credit is designed to help employers retain their employees and keep them on the payroll, even if their business operations were significantly impacted.
In general, the ERC is a refundable tax credit that is calculated based on a percentage of qualified wages paid to employees during the pandemic. The credit is available to eligible employers who experienced a substantial decline in gross receipts or were subject to government-mandated closures or restrictions.
Now, the question arises as to whether employers in California are required to pay state taxes on the ERC. The answer to this question lies in understanding the state’s tax laws and how they interact with federal tax credits.
Under California law, the state conforms to many federal tax provisions, but not all. In the case of the ERC, California generally follows the federal guidelines, which means that the credit is also available to eligible employers in the state. However, when it comes to the tax treatment of the ERC at the state level, there are some differences.
The California Franchise tax Board (FTB) has clarified that while the ERC is not considered taxable income for federal tax purposes, it is indeed taxable for California state income tax purposes. This means that employers who claim the ERC on their federal tax return will also need to include it as taxable income on their California state tax return.
It’s important for businesses in California to be aware of this tax treatment and to plan accordingly when it comes to accounting for the ERC. While the credit provides much-needed financial assistance, it’s essential to understand the potential tax implications at both the federal and state levels.
Employers should work closely with their tax advisors or professionals to ensure that they are accurately reporting and accounting for the ERC on their tax returns. Additionally, proactive tax planning can help businesses minimize their tax liability and make the most of available credits and deductions.
In conclusion, employers in California are indeed required to pay taxes on the employee retention credit for state income tax purposes. Understanding the state’s tax laws and how they apply to federal tax credits is crucial for businesses to properly account for the ERC and plan for their tax obligations. By staying informed and working with tax professionals, businesses can navigate these tax laws effectively and ensure compliance with state and federal tax regulations.