Understanding The Non-Refundable Portion Of The Employment Retention Credit

Running a business is difficult, and the COVID-19 pandemic didn’t make it any easier for businesses worldwide. To mitigate damage to businesses as a result of the pandemic, the U.S. Congress, fortunately, passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. One key component of the CARES Act is the Employee Retention Credit (ERC). While many small business owners have acted to take advantage of the ERC to reduce their taxes owed or receive a much-needed tax refund, however, many are unaware that a portion of the ERC can be non-refundable.

To help you better understand and accurately anticipate how the ERC could benefit your business’ bottom line, let’s discuss how the ERC works and which portions are non-refundable.

The Employee Retention Credit

To incentivize companies to keep employees on the payroll during the coronavirus, the ERC allowed companies to take a 70% tax credit for up to $10,000 of an employee’s qualifying wages in each quarter of the first three quarters of 2021. Companies which started after February 15, 2020 and made less than $1,000,000 in gross receipts could also qualify for $7,000 in the fourth quarter of 2021. Companies could also take up to $5,000 in credit for the 2020 year. 

The credit reduces a business’s total owed taxes. It does not lower its taxable income like a deductible. 

The ERC was focused on more small businesses with fewer than 500 employees in 2021 or less than 100 employees in 2020. However, any business can qualify if the business meets the required criteria for the ERC. Find out more about the ERC and if you qualify. Companies can only qualify for the credit if they were subject to a lockdown or a significant loss of revenue. 

In 2021, the ERC was also amended to help startup businesses, too. “Recovery Startup Businesses” are companies that were started after February 15, 2020, and had less than $1 million in revenue. Recovery startup businesses can apply for the ERC for Q3 and Q4 of 2021 and receive up to $50,000 in ERC per quarter. 

What is the Non-Refundable Portion of the ERC?

It really comes down to some confusing definitions. 

Most people think of a refund as money they’re getting back that they already paid. But in the case of the refundable portion of the ERC, if you qualify for the tax credit, you will most likely be getting more money back than you initially paid in payroll taxes. 

That’s because the refundable portion of the ERC is meant to offset your total payroll expenses and is calculated on qualifying wages minus any remaining social security or medicare tax liability, depending on the quarter.

In IRS speak, the term “non-refundable” means that the amount cannot be used to increase a business’s refund or create a refund that wasn’t there prior. Most tax credits are nonrefundable.

With the nonrefundable portion of the ERC, you are credited up to, but not more than, the amount you paid in social security or medicare taxes for each qualifying quarter.

When your ERC is being calculated, your total tax credit will be a combination of these two portions. 

How to Claim the ERC on Form 941-X

If you qualify for the ERC, but did not use the credit in previous filings and overpaid your taxes, you will need to amend your quarterly filings with Form 941-X. 

Form 941-X requires a bit of information, including when you discovered the error (or in this case, when you discovered you qualified for the ERC), the monetary amount, and why you believe the mistake happened. Since the form can have some complicated pieces, it is best to work with someone with expertise in ERC. 

If you’re filing a Form 941-X, you have 3 years from the initial filing to amend your taxes. 

Can I Still Qualify for the ERC? 

Good news! Businesses can still qualify and apply for the ERC. The Employee Retention Credit officially ended on September 30, 2021, but businesses have 3 years from that date to look back at taxes and apply for the ERC. 

Even if your business received other assistance from a Paycheck Protection Program (PPP) loan, you might still qualify for the ERC.

Get Started on Your ERC

The ERC is a great benefit for businesses affected by the pandemic. If your business kept your team employed during the pandemic and you were affected by a lockdown or a drop in revenue, you may be eligible for the ERC. The non-refundable part of the ERC is based on the Social Security Tax of the employees. However, if you amend a previous Form 940, the Social Security Taxes may have already been paid, and the non-refundable portion is already settled. 

Filing for or amending an Employer’s Quarterly Federal Tax Return to get the ERC can be a bit daunting for business owners. Working with a team who understands the ERC and how to file correctly will help streamline the process. 

_{Information provided on this blog is for educational purposes only, and is not intended to be business, legal, tax, or accounting advice. The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. While Lendio strives to keep its content up-to-date, it is only accurate as of the date posted. Offers or trends may expire, or may no longer be relevant.}