The employee retention credit is not taxable income for federal income tax purposes. This is explicitly stated in the retrieved information from Notice 2021-20, which specifies that "An employer receiving a tax credit for qualified wages, including allocable qualified health plan expenses, does not include the credit in gross income for federal income tax purposes. Neither the portion of the credit that reduces the employer's applicable employment taxes, nor the refundable portion of the credit, is included in the employer's gross income." Therefore, the employee retention credit, whether it is used to reduce the employer's applicable employment taxes or received as a refundable portion, does not contribute to the employer's gross income and is not considered taxable income.
Sources:
§ 280C. Certain expenses for which credits are allowable
Notice 2021-20
T.D. 9904
Publication 1693 (4/2023)
Publication 5420-E (10/2020)
Notice 2021-49
