The Federal Employee Retention Credit is a big pandemic tax relief measure for many employers. The maximum credit for 2020 was $5,000 per employee for the year and for 2021 it was $7,000 per employee per quarter, usually for the first two quarters.
The credit is claimed on the employer’s federal quarterly payroll tax report, Form 941. The deduction for wages on the employer’s federal income tax return is reduced by the credit claimed with respect to the wages.
California hasn’t conformed to the federal tax laws relating to the Employment Retention Credit.
On the California individual income tax return, trade or business income is reported based on Federal Schedule C, with adjustments made on California Schedule CA. Part I, Section B.
According to 2020 FTB Publication 1001 (Revised November, 2021), page 13, the federal reduction of wages doesn’t apply on the California income tax return. The federal wages reduction (Employee Retention Credit amount) should be subtracted from the federal business income at Form 540 Schedule CA, Part I, Section B, line 3, Column B.
This correction to the wages deduction should also be made on other California business income tax returns for 2020 and 2021.
Taxpayers and tax return preparers should also find out if this adjustment applies for other states.
This adjustment wasn’t previously widely publicized, so if you had an Employee Retention Credit for 2020, you might be entitled to a big refund by filing an amended 2020 California income tax return (Form 540 Schedule X for individuals.)
Spidell Publishing, which tracks California tax developments, just issued a correction on January 27, 2022 for the February issue of Spidell’s California Taxletter(R) about this issue, so if you or your tax return preparer missed it, you’re in good company.