The Non-Refundable Portion of the Employee Retention Credit Explained

Employee Retention Credit ERC
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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. Many don’t realize they can file for 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 section of the employee retention tax 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 the 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 nonrefundable portion is equal to 6.4% of wages. This is the employer’s portion of Social Security Tax.

Form 941

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.

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.

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

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

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.

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

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.

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

Preparing Form 941-X

You need to complete a separate Form 941-X for every Form 941 you need to amend. You fill in the company information on every page, indicating in the top right corner the return you are correcting. You must also show the date you realized the original form is incorrect.

To claim a refund you need to check part 1, box 2, and check part 2, box 5d. The entire ERC amount is shown as a negative number on line 18 as a nonrefundable portion. It is shown on line 26 as a refundable portion. 

Use the worksheet to calculate the non-refundable amount and the refundable amount of ERC. The non-refundable amount is what you apply against the 6.2% employer’s share of Social Security Tax. The remaining balance is refundable.

When filing Form 941-X the total amount of the employer’s Social Security tax is refundable. This is because the tax was paid with the original filing of Form 941.

Line 30 of the form shows the ERC qualifying wages, while Line 31 shows health plan expenses. The total of those two lines is what you multiply by the credit percentage of 50% for 2020 or 70% for 2021. The amount should equal the total ERC shown on lines 18 and 26 of your form.

You explain the reason for your overreporting amounts on form line 37. The explanation needs to be in detail and include the Form 941-X lines the error impacts. You will need to provide the date you found the error, the dollar amount of the error, and the reason the mistake happened.

You have three years from the date of your original Form 941 filing to file Form 941-X claiming ERC.

These instructions are simplified. To make sure you follow all procedures properly and receive the full credit due, you need to consult with an ERC specialist. They will answer all questions and prepare your 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.

Get Help Obtaining 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 Employee Retention Credit and find out how we can help your business ensure you are receiving your full credit amount.

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More Great Information For Employers:

On November 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act into law, and the Employee Retention Credit sunset date was moved from 12/31/2021 date to 9/30/2021 (for businesses other than ARPA Recovery Startup Businesses). 

HOWEVER, this does not mean the ERC was eliminated! Eligible businesses can still apply for stimulus funds based on financials between 3/13/2020-9/30/2021.