If the refundable credit exceeds the amount of tax you owe, you will receive the difference as a refund. If the credit is non-refundable and is higher than the taxes you owe, you lose the excess. With ERC, the non-refundable part is equivalent to 6.4% of salaries. This is the part of the Social Security tax that the employer pays.
Disaster loan counselors can help your business with the complex and confusing employee retention credit (ERC) and employee retention tax credit (ERTC) program. If an employer determines that you were an eligible employer during a previous quarter in which you did not apply for the ERC, you can apply for the credit retroactively by filing an adjusted quarterly federal tax return from the employer or a request for reimbursement on the IRS Form 941-X. When filling out Form B, if you have 100 full-time employees or fewer, you must apply the non-refundable partial assistance credit for the full quarter to the obligation of the first payroll payment of the month, no less than zero. An eligible employer applies for ERC on the employer's federal employment tax returns on IRS Form 941. The non-refundable part of the ERC simply reduces the amount of tax payable to zero; a non-refundable tax credit does not result in a return.
The ERC is a refundable tax credit that helps companies pay the costs of maintaining their workforce. These include the PPP (Paycheck Protection Program), the EPTD (Employer Payroll Tax Deferral) and the ERC (Employee Retention Credit). No part of the ERC reduces the employer's deduction for their participation in Social Security and Medicare taxes. On Form 941, any portion of the credit remaining for eligible sick and paternity leave payment at the end of the quarter that exceeds the employer's share of the quarter's Medicare taxes is recovered as a non-refundable credit.
The refundable portion of the credits does not reduce the liability indicated on line 16 of Form 941, Form 941-SS, or Annex B (Form 94). The denial of expenses related to the ERC, however, is based on Section 280C (which addresses expenses related to the reimbursement of certain tax credits). You don't have the right to a return on non-refundable tax credits, but they reduce your federal tax burden. Non-refundable tax credits, on the other hand, can hurt low-income taxpayers, since they can't always use the full amount of the credit.
The ERC is fully refundable because the eligible employer can receive a refund if the amount of the ERC is greater than the applicable employment taxes owed by the eligible employer. If the credit is non-refundable and exceeds the tax burden, you lose the franchise in a recovery startup.