Business Finance

Understanding the Non-Refundable Portion of the Employment Retention Credit

Aug 11, 2022 • 4 min read
employee retention tax credit pandemic
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      Running a business is difficult, and the COVID-19 pandemic didn’t make it any easier for businesses worldwide. To mitigate damage to businesses as a result of the pandemic, the U.S. Congress, fortunately, passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. One key component of the CARES Act is the Employee Retention Credit (ERC). While many small business owners have acted to take advantage of the ERC to reduce their taxes owed or receive a much-needed tax refund, however, many are unaware that a portion of the ERC can be non-refundable.

      To help you better understand and accurately anticipate how the ERC could benefit your business’ bottom line, let’s discuss how the ERC works and which portions are non-refundable.

      The Employee Retention Credit

      To incentivize companies to keep employees on the payroll during the coronavirus, the ERC allowed companies to take a 70% tax credit for up to $10,000 of an employee’s qualifying wages in each quarter of the first three quarters of 2021. Companies which started after February 15, 2020 and made less than $1,000,000 in gross receipts could also qualify for $7,000 in the fourth quarter of 2021. Companies could also take up to $5,000 in credit for the 2020 year. 

      The credit reduces a business’s total owed taxes. It does not lower its taxable income like a deductible. 

      The ERC was focused on more small businesses with fewer than 500 employees in 2021 or less than 100 employees in 2020. However, any business can qualify if the business meets the required criteria for the ERC. Find out more about the ERC and if you qualify. Companies can only qualify for the credit if they were subject to a lockdown or a significant loss of revenue. 

      In 2021, the ERC was also amended to help startup businesses, too. “Recovery Startup Businesses” are companies that were started after February 15, 2020, and had less than $1 million in revenue. Recovery startup businesses can apply for the ERC for Q3 and Q4 of 2021 and receive up to $50,000 in ERC per quarter. 

      What is the Non-Refundable Portion of the ERC?

      In IRS speak, the term “non-refundable” means that the amount cannot be used to increase a business’s refund or create a refund that wasn’t there prior. The tax credit is applied against applicable employment taxes. For example, if the credit for which you are eligible through the nonrefundable portion of the ERC exceeds the total amount you owe in Social Security or Medicare taxes, you will not receive a refund for the excess amount. Inversely, 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 an employer already paid its portion of the Social Security and Medicare taxes but wants to retroactively claim the ERC, then those businesses are eligible for a refund on the taxes that were paid.  

      How to Claim the ERC on Form 941-X

      If you qualify for the ERC, but did not use the credit in previous filings and overpaid your taxes, you will need to amend your quarterly filings with Form 941-X. 

      Form 941-X requires a bit of information, including when you discovered the error (or in this case, when you discovered you qualified for the ERC), the monetary amount, and why you believe the mistake happened. Since the form can have some complicated pieces, it is best to work with someone with expertise in ERC. 

      If you’re filing a Form 941-X, you have 3 years from the initial filing to amend your taxes. 

      Can I Still Qualify for the ERC? 

      Good news! Businesses can still qualify and apply for the ERC. The Employee Retention Credit officially ended on September 30, 2021, but businesses have 3 years from that date to look back at taxes and apply for the ERC. 

      Even if your business received other assistance from a Paycheck Protection Program (PPP) loan, you might still qualify for the ERC.

      Get Started on Your ERC

      The ERC is a great benefit for businesses affected by the pandemic. If your business kept your team employed during the pandemic and you were affected by a lockdown or a drop in revenue, you may be eligible for the ERC. The non-refundable part of the ERC is based on the Social Security Tax of the employees. However, if you amend a previous Form 940, the Social Security Taxes may have already been paid, and the non-refundable portion is already settled. 

      Filing for or amending an Employer’s Quarterly Federal Tax Return to get the ERC can be a bit daunting for business owners. Working with a team who understands the ERC and how to file correctly will help streamline the process. 

      If you’re curious if you qualify for the ERC or you’re looking to amend a previous form 940, Lendio can help.

      See If You Qualify For The ERC

      The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. Any content provided by our bloggers or authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything. The information provided in this post is not intended to constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.
      About the author
      Andrew Adams

      Andrew Strom Adams writes about business, marketing, technology, and finance for small businesses. He holds an MBA from Westminster College in Salt Lake City and a bachelor's degree in Journalism from Oklahoma Baptist University. He's helped law firms, startups, and other companies communicate more effectively. Andrew takes complex topics and distills them to help educate a company's target customers. He's based in Salt Lake City and enjoys hanging out with his two kids, enjoying the outdoors, and watching reality tv.

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