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 their employees. This credit was created in response to the COVID-19 pandemic and offers businesses the opportunity to apply for a tax credit on qualifying salaries, including certain health insurance costs. Most employers, including colleges, universities, hospitals and 501 (c) organizations, could be eligible for the ERC after the enactment of the United States Rescue Plan Act. Companies can no longer pay salaries to apply for the employee retention tax credit, but they have until 2024 and, in some cases, 2025, to analyze their payrolls during the pandemic and apply for the credit retroactively by filing an amended tax return.
The IRS has protective measures in place to prevent wage increases from being counted for the credit once the employer is eligible to receive the employee retention tax credit. The employer must 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. The fundamental difference between a refundable tax credit and a non-refundable tax credit is that if the total of your non-refundable tax credits exceeds the amount of income tax you owe, the balance due will only be reduced to zero; the excess refund will not be refunded to you. However, with a refundable tax credit like the ERC, if your total credits exceed your income tax liability, you will receive a refund for the full amount of your credits.
Keep in mind that an eligible employer receiving these grants must keep records that justify where the funds were used. This request allows the company to request the eligibility requirements and the payment of the quarter's credit in advance. Similarly, keeping track of acceptable earnings and the total credit allowed in each pay period reduces the risk of penalties if the employer deposits less than the required amount. The notice includes guidance on how employers who received a PPP loan can retroactively apply for the employee retention tax credit.
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. Eligible employers, including PPP beneficiaries, can apply for a credit against 70% of qualified wages paid. Employers 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. In addition, since the creation of the ERTC program, several laws have come into force that influence how credits can be requested.