Non Refundable Portion of Employee Retention Credit for Businesses

nonrefundable tax credit

What is the Non Refundable Portion of Employee Retention Credit

The non-refundable portion of the Employee Retention Credit corresponds to the Social Security 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 portion of ERC.

Purpose of Employee Retention Credit

The introduction of the Employee Retention 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. 

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

Using Employee Retention Credit can only come second to understanding non-refundable Employee Retention Credit. 

Refundable vs Non Refundable Tax Credit

Before diving into the non-refundable Employee Retention Credit, you must recognize the benefits of the Employee Retention Credit.

What is the Employee Retention Credit?

An important aspect of the Employee Retention Credit is the tax credit it provides to employers. This can encourage them to retain more employees without worrying about the cost.

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

If you are worrying about the taxes you will have to submit after a rough year, you can depend on the Employee Retention Credit. This government-supported incentive provides tax credits that can reduce the total taxes to be paid allowing many businesses to get a cash refund. 

Remember that the Employee Retention Credit was formed to support businesses suffering during the pandemic. Thus, a business formed during the lockdown or suffered a loss during that time can apply. Moreover, smaller businesses are automatically eligible. 

As the Employee Retention Credit grows, it has begun to spread its wings wider and support fresh entrants. The support provided to startups ensures a smooth transition.

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

Refundable vs. Non-Refundable Tax Credit: What’s the Difference? 

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 pay the tax your business accumulated throughout the year. Refundable credits are possible when your total credits received outweigh your tax. This makes you eligible for a tax refund. 

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

What is Non Refundable Employee Retention Credit 

Form 941 is a crucial part of the taxation process for any business. This is where the IRS 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

It has become harder to calculate the Employee Retention Credit 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 Employee Retention Credit yet, and you have paid your Social Security Tax, you can recover the non-refundable Employee Retention Credit. 

Professional Help with the ERC Pros

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. 

If you want to claim the Employee Retention Credit benefits, you must correct errors in 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. 

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Calculating the Non-Refundable ERC

Calculations for non-refundable Employee Retention Credit can be complicated. Since you don’t have those worksheets to depend on anymore, you must use your understanding instead.

Remember that the non-refundable part of the Employee Retention Credit is limited to the business’ Social Security Tax. The rest is refundable. 

The Future of Employee Retention Credit

The Employee Retention Credit was discontinued as of 30th September 2021. This meant that any business expecting credit in the fourth quarter of 2021 and after would not be able to benefit from it. However, you may wonder what happens if you plan to receive Employee Retention Credit. 

non-refundable erc
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.

Federal Income Tax After Non Refundable Credits

Remember that all tax credits provided by the EMPLOYEE RETENTION CREDIT 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 more acts designed 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. 

Despite the benefits, many businesses fail to use the Employee Retention Credit to their advantage. This is because they don’t know how to use it and when they are eligible.

As the EMPLOYEE RETENTION CREDIT was terminated, many businesses failed to understand the policies that applied to them and those that didn’t. This pushed them to move away from the Employee Retention Credit. 

If you are confused about the penalties that apply to your business after the termination of the Employee Retention Credit or any benefits that 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. 

Non Refundable Portion of Employee Retention Credit Conclusion

To sum it up, Employee Retention Credit is not always non-refundable. All you need is 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!

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