What is The Non-Refundable Portion of the Employee Retention Credit?

Non-Refundable Portion of the Employee Retention Credit
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The benefits of the Employee Retention Credit (ERC) include being able to take a 70% tax credit. The credit covers up to $10,000 per employee for wages paid during each quarter of 2021. This COVID-19 relief package from the federal government is both a blessing and a curse.

As if dealing with the government and IRS isn’t stressful enough, the program has undergone constantly changing rules and deadlines. This leaves many businesses not quite sure where their business stands on receiving ERC, especially the non-refundable portion of employee retention credit of the tax credit. Many businesses don’t even realize that they can file for the ERC in 2022.

We’re going to add to your ERC stress, but we’ll also give you the tools to navigate it. Are you aware there is a non-refundable portion of the employee retention credit program?  If you find yourself going “huh?” keep reading to learn all about it.

Do Businesses Pay Back COVID Relief Employee Retention Credits?

The ERC came about due to the Coronavirus Aid, Relief, and Economic Security (CARES) Act. One of its goals is to keep people working and getting paid.

The tax credits under this program are fully refundable for eligible employers. To be eligible, employers needed to maintain employees on their payroll.

The non-refundable portion is the employer’s portion of the social security tax. This applies to the tax on wages paid in the remaining quarter, following the first share, following a reduction by credits claimed on line 11a of Form 941.

When you complete line 16 of Form 941, Form 941-SS, or Schedule B, you are accounting for the non-refundable portion of employee retention credit. This applies to family leave and sick pay wages for an entire quarter. It includes the employer’s share of Medicare tax and health plan expenses allocated to those wages. 

What Is a Nonrefundable Credit?

If a credit is nonrefundable, the amount cannot be used to increase the refund you receive or create a tax refund that previously did not exist. It is not allowable for your refund or savings amount to exceed the amount of tax due.

If a refundable credit is more than the amount of tax you owe, you will receive the difference as a refund. If the credit is nonrefundable and is higher than the taxes you owe, you lose the overage.

With ERC, the non refundable portion is equal to 6.4% of wages. This is the employer’s portion of Social Security Tax.

Form 941

Revision of Form 941 in March 2022

Following the expiration of the Employee Retention Credit, the IRS issued a revision of Form 941 in March 2022. The Employer’s Quarterly Federal Tax Return still has lines for claiming tax credits.

Lines for Claiming Tax Credits

Those are for qualified leave of employees in 2021 and qualified leave wages being paid in 2022. There may be some employers who can claim the COBRA premium assistance credit during the first quarter of 2022.

ERC Not Eligible for 2022 Wages

The form no longer includes worksheets in the instructions for calculating the ERC. That credit is not eligible for 2022 wages.

Claiming ERC Using Form 941-X

You can claim the ERC if you overreported taxes on prior Form 941 filings. This is done using Form 941-X.

Nonrefundable ERC Portion

For the first and second quarters in 2021, the nonrefundable ERC portion is 6.4% of the wages. This is equal to the employer’s portion of Social Security Tax.

Recovering Non-Refundable Section of ERC

The term “nonrefundable” is incorrect if the business did not claim the ERC. If the employer paid their share of Social Security tax by federal deposits, then the non-refundable section of the employee retention tax credit is recoverable. This is explained on line 18 of the Form 941-X instructions.

Entering Amounts Correctly

The instructions state that the tax preparer needs to copy the amount from column 3 into column 4. To indicate the proper amount as a balance due or credit, you enter a positive number in column 3 as a negative number in column 4. If the number is negative in column 3, you enter it as a positive in column 4.

Failure to Change Number

If person preparing form fails to change number in Column #4 to a negative, taxpayer will not benefit from full ERC credit.

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Amending Form 941-X for The ERC

Businesses always need to amend their tax forms when there are errors on the original form. This may include incorrect information or calculations. It is important to correct these mistakes as soon as possible in order to avoid any penalties or fines.

The employee retention tax credit is one such credit that businesses may need to amend their forms for. To claim this credit, businesses must complete a separate Form 941-X for every Form 941 they need to amend. They must also show the date they realized the original form is incorrect.

Preparing Form 941-X

Completing Form 941-X

  • Separate form for each amended Form 941
  • Fill in company information on every page
  • Indicate return being corrected in top right corner
  • Show date original form was realized as incorrect

Claiming a Refund

  • Check Part 1, Box 2 and Part 2, Box 5d
  • ERC amount shown as negative number on Line 18 as nonrefundable portion and on Line 26 as refundable portion

Calculating Non-refundable and Refundable Amounts

  • Use worksheet to calculate amounts
  • Apply non-refundable amount against employer’s share of Social Security Tax (6.2%)
  • Remaining balance is refundable

Filing Form 941-X

  • Total amount of employer’s Social Security tax is refundable
  • Line 30 shows ERC qualifying wages, while line 31 shows health plan expenses
  • Multiply total by credit percentage (50% for 2020 or 70% for 2021)
  • Amount should equal total ERC shown on lines 18 and 26

Explaining Overreporting Amounts

  • Explain reason for overreported amounts on line 37
  • Detail mistake impact on Form 941-X lines
  • Provide date of error discovery, dollar amount of error, and reason for mistake

Timeframe for Filing Form 941-X Claiming ERC

  • Three years from date of original Form 941 filing

These instructions are simplified. For full guidance and proper procedures, consult with an ERC specialist who can answer all questions and prepare necessary documents.

The Employee Retention Credit (ERC)

With the Employee Retention Credit, employers receive encouragement for maintaining workers on their payroll by receiving a wage credit. For retaining their employees, businesses suffering the impact of COVID-19 receive a refundable credit of 50% or 70% for up to $10,000 in wages paid per quarter.

The credit is applied against “applicable employment taxes.” Employers knowing how to file for employee retention credit prior to the program ending were using Form 7200. This form allows the business to claim advance payment of the credits in advance of the quarter.

Credit on Form 7200 includes paid sick leave, family leave, health plan expenses, and the employer’s portion of Medicare taxes. The employer must keep the records and documents supporting each employee’s leave to substantiate the claim.

The employer also needs to save Form 941 Employer’s Quarterly Federal Tax Return. The deadline for filing Form 7200 was January 31, 2022.

nonrefundable portion of employee retention credit

Get Help Obtaining Employee Retention Tax Credits

Although the Employee Retention Credit program ended on September 30, 2021, businesses can take up to three years following the end of the program to request a look back at taxes paid. Startup businesses were eligible for credits through December 31, 2021.

ERC Today specializes in helping businesses determine eligibility to apply for the ERC and/or the Paycheck Protection Program (PPP). We can also assist with amending quarterly Form 941 for ERC qualifying businesses.  

Contact ERC today to get your questions answered about the nonrefundable portion of employee retention credit and discover how we can help your business ensure you are receiving your full credit amount.

Non-Refundable Portion of the Employee Retention Credit FAQs

The difference between the refundable and nonrefundable portion of ERC (Employee Retention Credit) is that the nonrefundable portion can only be used to offset an employer's share of Social Security tax liability. This means that if an employer has no Social Security tax liability, they cannot use the nonrefundable portion of ERC to receive a refund.
On the other hand, the refundable portion of ERC can be used to offset any federal employment taxes owed by the employer, including income tax withholding or Medicare tax. If the refundable portion exceeds the amount owed in taxes, then the excess can be refunded to the employer.
To calculate the non-refundable portion of the Employee Retention Credit (ERC), you need to determine the qualified wages paid to employees during the eligible quarter. The non-refundable portion is equal to 50% of qualified wages, up to a maximum of $10,000 per employee for all eligible quarters combined. So if an employer paid $20,000 in qualified wages to an employee during an eligible quarter, the nonrefundable portion of ERC would be $5,000 (50% of $10,000).
It's important to note that this credit can only be used to offset an employer's share of Social Security tax liability and cannot result in a refund if there is no Social Security tax liability owed.

The employee retention credit (ERC) is partially refundable. The refundable portion of the ERC is equal to 50% of the qualified wages paid to employees during an eligible quarter, up to a maximum of $10,000 per employee for all eligible quarters combined.

Form 941 is used by employers to report employment taxes, including any tax credits for which they may be eligible. Nonrefundable credits on Form 941 are tax credits that can only be used to offset an employer's share of Social Security tax liability and cannot result in a refund if there is no Social Security tax liability owed.
Examples of nonrefundable credits that may be reported on Form 941 include the qualified small business payroll tax credit, the research and development tax credit, and the work opportunity tax credit.

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