What is the difference between refundable and nonrefundable employee retention tax credits?

Taxpayers subtract refundable and non-refundable credits from the taxes they owe. If a refundable credit exceeds the amount of taxes due, the difference is paid as a refund. If a non-refundable credit exceeds the amount of taxes due, the franchise is lost. When you complete line 16 of Form 941, Form 941-SS, or Schedule B, you are accounting for the non-refundable portion of the credit.

If you qualify for the ERC, but didn't use the credit in previous returns and overpaid taxes, you'll need to modify your quarterly returns with Form 941-X. If a credit is non-refundable, the amount cannot be used to increase the refund you receive or to create a tax refund that didn't exist before. The credit on Form 7200 includes paid sick leave, family leave, health plan expenses, and the employer's share of Medicare taxes. The employee retention tax credit is one of those credits for which companies may need to modify their forms.

If the person preparing the form does not change the number in column 4 to a negative one, the taxpayer will not benefit from a full ERC credit. On the other hand, if the refundable credit you are eligible for is greater than the total amount you paid in payroll taxes, your company will receive a refund for the difference. If your company kept its team employed during the pandemic and was affected by a lockdown or a drop in revenues, you may be eligible for the ERC. A refundable tax credit not only reduces the federal tax you owe, but it could also result in a refund if it's more than what you owe.

If an employer has already paid their share of Social Security and Medicare taxes, but wants to apply for ERC retroactively, those companies are entitled to receive a refund of the taxes they paid. While many small business owners have taken steps to take advantage of the ERC to reduce their taxes due or receive a much-needed tax refund, many are unaware that a portion of the ERC may not be refundable. Tax credits can lower your tax bill or give you a bigger refund, but not all tax credits are created the same way. With the employee retention credit, employers are encouraged to keep workers on the payroll by receiving a wage credit.

Employers who knew how to apply for the employee retention credit before the program ended used Form 7200.

Denise Lefler
Denise Lefler

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