Understanding the Non-Refundable Portion of the Employee Retention Credit

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 Coronavirus Aid, Relief and Economic Security Act (CARES Act) originally established the ERC to encourage companies to keep employees on the payroll during the pandemic. The non-refundable portion of the ERC represents 6.4% of profits, which is the employer's contribution to Social Security. 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.

This applies to family leave and sick pay for an entire quarter, and includes the employer's share of Medicare taxes and health plan expenses that go toward those salaries. With ERC, the non-refundable part is equivalent to 6.4% of the salary. You can apply for the ERC if you overtaxed in previous Form 941 filings. This is done using Form 941-X. The term “non-refundable” is incorrect if the company has not claimed the ERC.

If the employer paid its share of Social Security tax through federal deposits, then the non-refundable section of the employee withholding tax credit can be recovered. This is explained in line 18 of the instructions on Form 941-X. To apply for this credit, businesses must complete a separate Form 941-X for each Form 941 that they need to modify. They must also show the date when they realized that the original form was incorrect. You must complete a separate Form 941-X for each Form 941 that you need to modify. You fill in the company information on each page, indicating in the upper right corner the return you are correcting.

You must also show the date you realized that the original form is incorrect. You have three years from the original filing date of Form 941 to file Form 941-X applying for the ERC. The ERC is fully refundable because the eligible employer can receive a refund if the amount of the ERC is greater than the applicable employment taxes owed by the eligible employer. This means that many companies are not very sure what their business position is in terms of receiving the ERC, especially the non-refundable part of the tax 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 IRS Form 941-X.The credit on Form 7200 includes paid sick leave, family leave, health plan expenses, and the employer's share of Medicare taxes. An eligible employer applies for ERC on their federal employment tax returns on IRS Form 941. To ensure that you follow all procedures correctly and receive all of the credit due, you should consult an ERC specialist.

If a positive number in column 3 is not changed to a negative number in column 4, then the ERC indicated on Form 941-X will be unnecessarily reduced. If a company decides to exclude qualifying salaries stated in their PPP loan forgiveness application for purposes of applying for ERC, it is important to remember that if their share of Social Security tax was paid, then they can recover their non-refundable portion of this tax credit.

Dustin Hafferkamp
Dustin Hafferkamp

Incurable pop culture enthusiast. Unapologetic pop culture practitioner. Hardcore travel advocate. Certified tv enthusiast. Lifelong food junkie.

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