The Employee Retention Credit (ERC) is a tax credit available to employers who have seen a reduction in their gross income due to the coronavirus pandemic. The non-refundable portion of the ERC represents 6.4% of profits, which is the employer's contribution to Social Security. This is the part of the Social Security tax that the employer pays. An eligible employer applies for ERC on the employer's federal employment tax returns on IRS Form 941. If the employer's portion of the Social Security tax was paid, then the non-refundable portion of the ERC is refundable. The credit on Form 7200 includes paid sick leave, family leave, health plan expenses, and the employer's share of Medicare taxes. 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.
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.These changes included the extension and changes in the credit related to COVID-19 for qualified salaries for family leave and sick leave, slight modifications to the ERC mechanics, and the new credit for payments for assistance with COBRA premiums. 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 ERC is fully refundable because the eligible employer can receive a refund if the amount of the ERC is greater than the applicable payroll taxes owed by the eligible employer. If a positive number in column 3 is not changed to a negative number in column 4, the ERC indicated on Form 941-X will be unnecessarily reduced. 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. The Coronavirus Aid, Relief and Economic Security Act (CARES Act) originally established the ERC to encourage companies to keep employees on their payroll during the pandemic.
It is important to understand how this non-refundable portion works in order to maximize your benefits from this credit. The instructions went on to state that the non-refundable portion of the credits can be deducted to the extent that the employer participates in the social security wage tax associated with the first payroll payment and then to the extent that the employer participates in the social security tax associated with subsequent payroll payments for the quarter until the credit is used. For more information on how this applies to your company's specific circumstances, contact your Meaden & Moore representative. John Nicklas is vice president of Assurance Service Group and has more than 20 years of experience meeting accounting and business advice needs. We hope you found it useful and that next time we'll see an episode on how to maximize ERC and PPP in overlapping periods.