Beware of Non-Refundable ERC Tax Credit vs Refundable in 2023

Generally, tax refunds cannot be refunded. The taxpayer will forfeit the credits. Non refundable ERC credits have different attributes than refundable credits due to their non-refundable nature.

This tax deduction will decrease your federal income taxes by not requiring you to file returns. Refundable tax credits are helpful to people who want tax relief and to reduce their tax payments.

The basic difference between refundable and non-refundable tax credits is that if your nonrefundable tax credits exceed your income tax obligation, your debts will be reduced and the surplus refund cannot be reimbursed.

Refundable vs Non Refundable Tax Credit

Before diving into the non-refundable portion of the Employee Retention Tax Credit, you must better understand the workings of the ERC and ERTC.

Not all tax credits are refundable. When planning becomes difficult, businesses usually come across the non-refundable tax credits later in the year. Thus, it is best to understand it ahead of time. 

Tax credits can be used to for your business which are accumulated throughout the year. Refundable credits are possible when your total credits received outweigh your tax. This makes you eligible for a payroll tax refund. 

In the case of non-refundable credits, a tax refund is not possible for those portions. 

What is the ERC and ERTC?

The first thing to understand is that both the ERC and ERTC are interchangeable and work within the same rules.

An important aspect of the tax credits is that it provides eligible employers an opportunity to retain more employees without worrying about the cost.

The tax credits provide employers with a 70% tax credit that applies to an employee’s wages (up to $10,000) for each quarter. 

If you worry about the taxes you must submit after a rough year, you can depend on these refundable tax credits. This government-supported incentive provides tax credits that can reduce the total taxes to be paid allowing many businesses affected to get a cash refund. 

Remember that the Employee Retention Credit was formed to support businesses suffering during the pandemic. Thus, recovery start up businesses during the lockdown or suffered a loss during that time can apply. Moreover, smaller businesses with less than 500 W-2 employees have a good chance of being eligible. 

As the Internal Revenue Service program grows, it has begun to spread its wings wider and support fresh entrants. The support is not only recovery startup businesses.

However, not all of the payroll tax credits can be refunded. This leads us to the non-refundable Employee Retention Credit.

Understanding the Purpose of the Employee Retention Tax Credit

The introduction of the Employee Retention Tax Credit solved a major problem for most employers and workers during the pandemic.

It allowed employees to retain their jobs without burdening business owners with rising costs. Thus, it is vital to understand all aspects of the Employee Retention Credit, including the non-refundable parts. 

Through the Employee Retention Credit, the government has allowed business owners to gain credit in return for retaining as many employees as possible.

It has encouraged many business owners to avoid letting employees go during the economic instability caused by the pandemic. 

You can gain up to $10,000 per employee each quarter through applicable employment taxes. This goes a long way! However, some of the parts of the Employee Retention Credit are non-refundable.

What is the Difference Between Refundable and Non Refundable ERC Tax Credits

The difference between the refundable and non refundable ERC is that the nonrefundable portion can only be used to offset an employer’s share of Social Security tax liability.

This means that if an employer has no Social Security tax liability, they cannot use the non refundable ERC to receive a refund.

On the other hand, the refundable portion of ERC can be used to offset any federal employment taxes owed by the employer, including income tax withholding or healthcare tax. If the refundable portion exceeds the amount owed in taxes, then the excess can be refunded to the employer.

What is the Non-Refundable Portion of the ERC?

The non-refundable portion of the Employee Retention Credit corresponds to the payroll tax contributions made by your company.

It is regarded as non-refundable because it cannot exceed the sum you were required to pay. Your responsibilities are offset by the income tax credit’s non-refundable portion. 

The value’s non-refundable element is limited to the share of social security tax paid by the business shown on Form 941, less any refund for a Form 8974 requested qualifying small business payroll tax credit for research.

There certainly is more to it so let’s take a deeper look at non-refundable ERC credits.

There are a lot of confusing terms here. Most people consider refunded funds as a payment they received earlier. But if you receive a refundable portion from ERC, you can expect more refunds than you had initially paid.

This is because a refundable amount from the ERC covers your full payroll expenses and is calculated as qualified wages without social security and Medicare taxes.

When credits are nonrefundable, the amount cannot affect your refund or tax refund if the credit is not previously issued. Your refund will not exceed your tax obligation.

When refunded credit amounts exceed the tax owed, you can have the difference returned as a refund. The excess amount of credit that is paid to eligible employers is not refundable unless the credit card pays the taxes. In terms of refunded wages, ERC equates to 6.4%. Employers provide the Social Security taxable amount and the qualified health plan expenses.

Businesses need to use Form 941 X to help in adjusting previous tax returns.

What is a Non Refundable ERC Tax Credit

Form 941 is a crucial part of the taxation process for any business. This is where the Internal Revenue Service communicates with you regarding any changes to how tax season will be conducted.

Following the expiry of the Employee Retention Credit in March 2022, reforms were introduced to Form 941, which changed some of its applications. 

The relevant changes are now highlighted in form 941-X.

Note that after March 2022, the non-refundable portion of the Employee Retention Credit was applied to 6.4% of employee wages. This was supposed to apply to the employee as the Social Security Tax. 

As of March 2022, the Employee Retention Credit could be availed for the following;

• Qualified leave of employees during the year 2021

• Qualified leave wages for employees paid in 2022

• Overreported taxes on the older form 941

Calculating the Employee Retention Credit has become harder as the form does not include worksheets for the calculations. Businesses must figure out both the refundable tax credits and non-refundable tax credit. 

Remember that if your business has not claimed the wage credit yet, and you have paid your Social Security Tax, you can recover the non-refundable portion or ERC. 

Importance of Form 941-X in Claiming the ERC Credit

Businesses must update their tax forms if they are unsure of the correct form. Often this can involve wrong figures. Consequently, correcting such errors must happen most quickly to reduce penalties.

The Internal Revenue Service requires businesses to make alterations to the forms they use. The business can use these credits by filing a Form 942-X form separately for every Form 941 that needs amendments.

Federal Income Tax After Non Refundable Tax Credit

Remember that all tax credits provided by the federal retention tax are refundable to businesses that meet the eligibility criteria. The most important factor is employee retention, which serves the CARES act’s main purpose. 

The part of the Employee Retention Credit, which is non-refundable, is limited to the employer’s Social Security Tax. The rest of the part is refundable. 

The IRS has also issued eligibility requirements to support businesses through the pandemic. This can allow them to receive tax credits far beyond the payroll taxes the employer must pay. Social Security Taxes are first deducted from the excess. Following this, the rest of the credit is refunded. 

Keep in mind that the Employee Retention Credit doesn’t just benefit the business owner but also the employee. When eligible, the business will significantly reduce wage deductions for employees. 

As the eligible quarter passed, many businesses failed to understand the policies that applied to them and those that didn’t. This gave the wrong impression that the business could no longer apply.

If you are confused about the penalties that apply to your business after terminating the Employee Retention Credit or any benefits you are still eligible for, you are not alone.

Remember that you can still claim that Employee Retention Credit if you did not take advantage of it in the previous years and were eligible during that time. For this, you will have to refer to IRS Form 941-X. 

Professional Help with the FTCO ERC

Filing taxes is already hard. Add to that the constant changes in rules and regulations, making it difficult to get through the year.

You need a professional to evaluate your payroll and taxes and help you understand the parts of the Employee Retention Credit that apply to your business. 

To claim the Employee Retention Credit benefits, you must correct the original Form 941. This may require a trained eye that can spot the nitty gritty details and amend them to avoid further penalties. 

With the change in the form, all information must be edited and moved to the new form. Multiple forms can be difficult to handle and take much of your precious time. 

Refundable Employee Retention Credit

Businesses that had planned according to the Employee Retention Credit may have reduced tax deposits. This could affect their tax filing as they may fail to pay their taxes. For this, the IRS has revised its regulations and provided rules that could make the transition easy. 

Moreover, any businesses eligible for the Employee Retention Credit who did not avail of it can do so through the new form. All you must do is correct the errors in the previous form and fill out the new one accordingly. 

This filing can take place as late as November 2024, depending on the fiscal Quarter you are filing for. But don’t wait; the rules could change at any time.

Importance of Taking Action Towards Your Businesses Tax Credit

To sum it up, Employee Retention Credit is not always non-refundable. We highly encourage a professional to analyze your payroll and push you in the right direction. 

If you are looking for a straightforward explanation of the non-refundable Employee Retention Credit and your eligibility for Employee Retention Credit, Federal Tax Credits can help. Our ERC pros have provided many businesses with guidance through the tough times of the pandemic. Moreover, we can help you realize your eligibility.

How you file your taxes can be the difference between eligibility and non-eligibility. Moreover, we can help you maximize the credits you receive and minimize non-refundable credits. You can fill out this form today to determine whether you are eligible for the ERTC.

If you haven’t applied for the ERTC in the past, you may still be eligible. Join us as we go through the application together and determine your eligibility. Maximize your credits and minimize the costs. We are here to help!