Understanding the Nonrefundable Portion of the Employee Retention Credit

The Coronavirus Aid, Relief and Economic Security (CARES) Act established the Employee Retention Credit (ERC) to encourage businesses to keep employees on their payroll during the pandemic. The ERC is a non-refundable tax credit that is equal to 6.4% of qualified wages paid to employees. This includes the employer's share of Medicare taxes and health plan expenses that go toward those salaries. If the credit is non-refundable and exceeds the tax burden, you lose the franchise in a recovery startup.

This means that you cannot use the amount to increase the refund you receive or to create a tax refund that didn't exist before. However, if the employer's share of Social Security tax was paid, then the non-refundable portion of the ERC can be recovered. Qualified ERC salaries include the portion of group health plan expenses (including employer contributions and employee contributions before taxes) that goes to salaries that would otherwise be eligible. The Relief Act increased the operating employee threshold from 100 full-time employees to 500 full-time employees.

To apply for this credit, businesses must complete a separate Form 941-X for each Form 941 that they need to modify. You must also show the date when you realized that the original form was incorrect. You have three years from the original filing date of Form 941 to file Form 941-X applying for the ERC. If you overtaxed in previous Form 941 filings, you can apply for the ERC using Form 941-X.

This is done by completing line 16 of Form 941, Form 941-SS, or Schedule B. Employers who knew how to apply for the ERC before the program ended used Form 7200. With this form, employers are encouraged to keep workers on their payroll by receiving a wage credit. The employee retention credit is one of those credits for which companies may need to modify their forms. This is explained in line 18 of the instructions on Form 941-X.

The non-refundable portion of the ERC does not exceed the employer's share of Medicare tax (2.9%) on all salaries for the quarter. The CARES Act originally established the ERC to encourage companies to keep employees on their payroll during the pandemic. Qualified wages include paid sick leave, family leave, health plan expenses, and the employer's share of Medicare taxes. All salaries paid to employees by an employer with severe financial difficulties are considered qualifying wages. A qualifying employer is considered to decide to exclude the qualifying salaries stated in their Paycheck Protection Program (PPP) loan forgiveness application for purposes of applying for the ERC.

Denise Lefler
Denise Lefler

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