Introduction
In any year, dealing with the IRS can be stressful and daunting for taxpayers. Since 2020, the Employee Retention Credit program has had numerous changes. As a result, it is often difficult for businesses to figure out whether or not they can leverage ERC. This is also the case when it comes to the non-refundable part of employee retention credit.
There is a reason many businesses see the ERC relief package as a blessing and a curse from the government. Last year, many businesses were unaware that they could’ve filed for Employee Retention Credit. But currently, businesses have a shot at turning the tables and making the most out of ERC in 2023. Specifically, you can avail 70% of the tax credit from the ERC. This credit covers over $10,000 for each employee’s paid wages during the first 2021 quarter.
So, what is the non-refundable part of the employee retention credit? Let’s touch on the basics:
Do Businesses Have to Pay Back their COVID-19 Employee Retention Tax Credits?
The ERC came into the picture as a COVID-19 relief package through CARES Act. One of the main objectives of this program was to help businesses retain their employees in 2020 and 2021. In ERC, eligible employers can claim fully refundable tax credits.
However, there are certain strings attached to getting the full tax credit refunds. For starters, employers have to be eligible and prove that they had full-time workers on the payroll during 2020 or 2021 to get tax refunds and recoup the costs.
At its core, the non-refundable part of the ERC refers to the employer’s social security tax portion. It applies to tax on paid wages for the remaining quarter of 2021. After the first share, it is followed by a reduction in credits that you claim through Form 941.
Once you fill out form 941 line 16, Schedule B, or Form 941-SS, you can account for your non-refundable part of the tax credit. It applies to paid sick leaves and family leaves for a quarter. It also covers the employer’s Medicare tax share and general health expenses as part of the paid wages.
Fundamentals of a Non-refundable Credit
When a tax credit is non-refundable, it means the employer cannot use it to increase their received refund amount. In short, you cannot exceed your savings or refund amount than the tax due. For instance, if a tax refundable credit is higher than the owed tax amount, the employer would get the difference as a tax credit.
If the credit is higher and non-refundable as opposed to owed taxes, you’ll lose the surplus amount. In Employee Retention Credit, the non-refundable part amounts to 6.4% of the paid wages. It represents the employer’s part of the Social Security tax.
Additionally, 6.4% of the profits signifies the social security contribution of the employer. Remember, you cannot use a non-refundable tax credit to start or return a new refund check. An employer’s return or savings share cannot be higher than the tax bill. And if the non-refundable tax credit is higher than the tax burden, the employer will lose the surplus amount as part of the recovery.
Non-refundable Credit for Small Businesses
The ERC works as a wage-based tax credit and rewards businesses for retaining employees during the 2020-21 COVID-19 impacted period. Eligible employers can get solid credit assistance and a refundable rebate of 50%-70% on paid wages higher than $10,000.
The non-refundable part of the tax credit applies to parental and sick leave allowed in 2022 for the 2020 period. But this ties together with the employer’s portion of the payroll earning tax in the same period. As a result, eligible small businesses will see a deduction for any sought-out credit percentage on Form 941 on their payroll tax credit.
In Form 941, if there is any part of credit left for eligible parental or sick leave at the end of the quarter and exceeds the employer’s share of the Medicare tax for will be non-refundable.
The refundable tax credit doesn’t impact the listed requirements on Schedule B. Full-time employees should check out the official IRs information to learn about tax credit eligibility on parental or sick leave and determine the applicable periods.
Non-Refundable Tax Credit
It is crucial to see Employee Retention Credit with a clear perspective. First, eligible employers cannot increase their tax burden higher than their savings. A general example would be if a tax credit on the tax return is $500 and your owed tax is $200. In this case, the remaining $300 is a non-refundable amount.
The non-refundable portion of wages is assistance for credit purposes and depends on the company’s limited equity on paid taxes in the quarter. You can lower the equity through any form of lending that the eligible employer claims on Form 941.
It can hint at the deposition part of the loans and covers family and sick leave on paid wages. Assuming you have 100 or fewer full-time employees and when filling out Form B, ensure you only apply for the non-refundable part of the credit assistance for the entire quarter.
Your goal should be to cover the first month’s payroll payment, which shouldn’t be less than zero. In this quarter, cover the debt with payroll checks until you use up the entire non-refundable portion of the tax credit.
Form 941
After the expiration of the ERC, the Internal Revenue Service decided to roll out a revised version of the From 941. But even after this change in March 2022, there are still lines in Employer’s Quarterly Tax Return that businesses can use to claim additional tax returns.
Primarily, it includes eligible employee leaves in 2021 and paid leaves in 2022. However, the form doesn’t include worksheet instructions to calculate the ERC. On the surface, it might seem that this credit is not up for grabs based on paid wages. But employers can still claim this ERC if they over-report their taxes before filing Form 941. Employers can claim this using Form 941-X.
For the first two quarters, the ERC non-refundable part amounts to 6.4% of the paid wages. It is equal to the eligible employer’s Social Security tax portion. Technicality can make all the difference when dealing with the non-refundable aspect of ERC.
The term “non-refundable” is right as long as the eligible employer didn’t claim the employee retention credit. But if the eligible business paid their Social Security tax share through federal deposits, the non-refundable part of the ERC is recoverable. Focus on Form 941-X line 18 for more details.
The official guidelines also state that eligible employers have to copy the value from column 3 to column 4. The idea is to show the proper amount as a credit or balance due. It means you either input a negative amount in column 4 or a positive one in column 3.
Practically, if the employer filling out the form doesn’t add or change a negative value in column 4, the employer won’t be able to leverage the full employee retention credit.
ERC and Amendment in Form 941-X
If there are no direct errors in the original form, employers will still have to amend their tax-related forms. But it is common for employers to input incorrect calculations or information. Therefore, correct these errors in a prompt manner to avoid potential fines or penalties.
ERTC is one of the credits that employers might have to tap into to amend their tax forms. Now, to claim this type of credit, employers first have to fill out a Form 941-X on every amended Form 941. These forms will highlight the date when employers realized their original form information was incorrect.
What Happens to the Portion of Employee Retention Credit that is not Refundable?
Suppose you’ve got both non-refundable and refundable tax credits. In that case, you will need to calculate the non-refundable tax credits and apply for the recoverable credits to help you improve your credit potential. The wise thing is to use non-refundable tax credits to lower your tax liabilities.
However, non-refundable tax credits can also impact low-income individuals. And that’s because taxpayers cannot always utilize the full credit amount. Remember that non-refundable credits are valid and applicable for the year you claim them and don’t roll over.
Final Thoughts
In layman’s terms, the non-refundable part of the employee retention credit decreases the tax payable amount to zero. It means a non-refundable tax credit doesn’t stem from the return. While taxpayers can get a return on their non-refundable tax credits, they can reduce some of their tax burden. In any case, refundable tax credits provide employers with a government refund and lower their tax payments simultaneously.
It is imperative for businesses to get familiar with the employee retention tax credit plan to figure out “when” and “how much” they can benefit from it. In retrospect, you’ll need proper tools and guidance to navigate Employee Retention Credit in 2023.
