Is the Employee Retention Credit a Refundable Credit?

The employee retention credit (ERC) is a fully refundable tax credit for employers that is equivalent to 50 percent of qualified wages, including allocable qualified health plan expenses, paid to employees. Even if a company does not owe any taxes, they will receive a tax refund for the full amount of their credit. Eligible employers, including those who have received Paycheck Protection Program (PPP) benefits, can apply for a credit against 70% of qualified wages paid. Employers reported the total qualifying wages and the employee retention credit related to COVID-19 on Form 941 for the quarter in which the qualifying wages were paid.

Companies who file an annual payroll tax return can file an amended return using Form 944-X (employer's adjusted annual federal tax return or request for reimbursement) or Form 943-X (adjusted federal employer tax return for agricultural employees or request for reimbursement) to apply for credits. To be eligible for the employee retention credit, a portion of an employer's business must be considered greater than a nominal share of operations if the gross revenues of that part of business operations are not less than 10% of gross revenues (determined by the same calendar quarter of 2018) or if the hours of service performed by the employee are that part of the company no less than 10% of the total number of hours of service performed by all employees of the employer's company. If an employer receives a late credit payment from Form 7200, the credits are canceled and the deposits are reduced. Employers who knew how to apply for the employee retention credit before the program ended used Form 7200.

To ensure that all procedures are followed correctly and all credits due are received, employers should consult an ERC specialist. Thomson Reuters has updated their employee retention credit tool to help employers determine if they qualify for the credit. If a person has both refundable and non-refundable tax credits, calculating the non-refundable credits first and then applying the eligible recoverable credits could help optimize overall credit potential. The non-refundable portion of the value is restricted to the company's portion of the social security tax recorded on Form 941, minus any refund for a small business payroll tax credit that qualifies to advance the research requested on Form 8974.On Form 941, any portion of the credit remaining for the payment of eligible sick and paternity leave at the end of the quarter that exceeds the portion of the Medicare tax for the quarter that exceeds the employer's share of the Medicare tax for the quarter is recovered as a non-refundable credit.

The employer could withhold federal income tax withheld from employees, employee participation in Social Security and Medicare taxes, and the employer's share of Social Security and Medicare taxes for all employees.

Denise Lefler
Denise Lefler

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