In recent times, economic uncertainties have compelled businesses to look for every available avenue to sustain operations and protect their workforce. Significant relief in this regard has been provided by the Employee Retention Credit (ERC), a tax incentive aimed at encouraging employers to retain their staff during challenging economic phases. Introduced as part of the CARES Act, the ERC has since been a cornerstone in alleviating the financial strain on businesses.
The ERC is broken into two main categories: the refundable and non-refundable portions. The refundable portion allows employers to receive a refund from the IRS if the credit exceeds the total amount owed in payroll taxes.
On the other hand, the non-refundable portion can only reduce the tax liability to zero without refunding any excess credit. While many employers have a fairly good grasp of the refundable segment of the ERC, the non-refundable portion often leaves room for ambiguity.
As we navigate through the intricacies of the non-refundable tax credit, it's our goal to provide a clear understanding that empowers businesses to optimize their tax positions effectively.
What Is the Non-Refundable Portion of the Employee Retention Credit?
In the realm of taxation, credits are conceived as a direct reduction in the tax liability, unlike deductions which reduce the amount of income subject to taxation. Tax credits are further delineated into refundable and non-refundable credits, each with distinct functionalities.
Non-refundable credits are aptly named as they can reduce a taxpayer's liability to zero, but not beyond that point. Any excess amount from non-refundable credits does not translate to a refund nor is carried forward to subsequent tax years. In essence, while they can significantly lower a tax bill, they halt at the zero mark and vanish thereafter.
The non-refundable part of the Employee Retention Credit (ERC) essentially covers a portion of the employer's payroll taxes, which could be either from Social Security tax or Medicare, based on when the claim is made. If the wages were paid between March 12, 2020, and July 1, 2021, this part of the credit is calculated using the employer's 6.2% share of Social Security taxes.
On the other hand, if the qualified wages were paid between July 1, 2021, and December 31, 2021, this part is calculated using the employer’s 1.45% share of Medicare taxes. It's important to use the non-refundable part of the ERC first to lower the employer's tax bill, but it can only bring the tax bill down to zero, not below that.
Non-Refundable vs. Refundable Portion of Employee Retention Tax Credit
- Non-refundable portion: The non-refundable portion of the ERC is primarily used to offset the employer's share of Medicare tax. It's applied against the employer's payroll tax liability. If the ERC exceeds the payroll tax liability, any remaining non-refundable credit amount isn't returned as a refund to the employer;
- Refundable portion: The refundable portion of the ERC, on the other hand, goes beyond covering payroll taxes. It allows businesses to receive a refund for the excess credit amount, meaning that if the ERC exceeds the total payroll tax liability and other applicable liabilities, the remaining amount is returned as a cash refund to the employer.
The applicability of these portions depends on the specific circumstances of each business. Understanding when and how to use each portion is key to maximizing the benefits of the ERC while ensuring compliance with tax regulations.
Qualifying for the Non-Refundable Portion of ERC
The non-refundable portion of the Employee Retention Credit (ERC) is subject to specific criteria and eligibility requirements that businesses must meet to claim the credit. Here's an overview of what it takes to qualify for the non-refundable portion and how it differs from the refundable portion.
Criteria and Eligibility Requirements for the Non-Refundable Portion
- Employer size: To qualify for the non-refundable portion, your business must meet certain size criteria. Generally, eligible employers are those with 500 or fewer full-time employees. However, there are exceptions for certain businesses, including those that experienced a partial or full suspension of operations due to government orders or a significant decline in gross receipts;
- Eligibility period: The non-refundable ERC is available for specific periods. Initially, it applied to wages paid between March 13, 2020, and December 31, 2020. Subsequently, it was extended through June 30, 2021. Make sure your business meets the eligibility criteria for the relevant periods;
- Operations suspension or gross receipts decline: The non-refundable portion is primarily aimed at businesses that faced government-mandated suspensions or experienced a significant decline in gross receipts during the eligible periods. You need to be able to demonstrate these circumstances to claim this portion.
Differences from the Refundable Portion of ERC
- Purpose: The non-refundable portion of the ERC is primarily intended to offset the employer's share of Medicare tax, while the refundable portion has a broader purpose, including refunding any excess credit;
- Eligibility focus: The non-refundable portion places a more significant emphasis on the specific circumstances of your business, such as operations suspension or gross receipts decline, compared to the refundable portion;
- Employer size: Both portions generally consider employers with 500 or fewer full-time employees, but exceptions may apply. Ensure you meet the size criteria for the respective portion.
Understanding the distinct criteria and eligibility requirements for the non-refundable portion of the ERC is important for businesses that want to claim this credit while complying with tax regulations.
If I Get More Employee Retention Credit than My Tax Amount, Do I Lose the Extra?
No, you won't lose the extra credit. If your Employee Retention Credit (ERC) is more than your tax amount, you can still get the full benefit if you file your taxes on time. The ERC has two parts: a non-refundable part and a refundable part. The extra credit amount beyond the non-refundable part is considered as your refundable credit.
The refundable part is great because it can take your tax bill below zero, meaning you could get a tax refund. So, when you claim the ERC on a special form (Form 941-X), you might end up with a tax refund that's bigger than the tax you paid for that period. After you send in Form 941-X, you can check to see if the IRS got your form and keep track of your ERC refund.
Non-Refundable Portion of the ERC: Affect on Tax Liability and Financial Standing
The non-refundable portion of the Employee Retention Tax Credit directly impacts a business’s tax liability by reducing the amount of payroll taxes owed. This reduction can significantly bolster a company's financial standing, especially in times of economic strain.
However, the benefit is bounded by the amount of tax liability a business has for that specific quarter. For businesses with minimal tax liability, the non-refundable portion may offer limited relief. On the flip side, for businesses with a higher tax liability, the non-refundable portion can offer substantial savings that free up funds that can be channeled toward other pressing needs.
In summary, while the non-refundable portion of the Employee Retention Tax Credit offers a valuable financial reprieve, the extent of its impact is intertwined with a business's tax circumstances and its ability to navigate the associated tax compliance landscape accurately.
Common Mistakes to Avoid with the Non-Refundable ERC
When it comes to the non-refundable Employee Retention Credit, it's important to avoid common mistakes and misconceptions.
We've provided some pitfalls to steer clear of and tips to help you navigate the process effectively:
- Ineligible wages: Ensure that the wages you claim for the non-refundable ERC fall within the eligible timeframes and meet the specific criteria. Misidentifying eligible wages can lead to overestimation;
- Mismatched timeframes: Pay close attention to the periods for which the non-refundable ERC applies. Using the wrong timeframe can result in miscalculations;
- Lack of documentation: Maintain thorough records of your payroll and financial data. Inadequate documentation may hinder your ability to substantiate your ERC claim during an audit;
- Double-dipping: Avoid claiming the same wages for multiple COVID-19 relief programs, such as the Paycheck Protection Program (PPP) and ERC, for the same periods. Double-dipping can lead to penalties.
Deadlines and Important Dates for the Employee Retention Credit
Navigating the Employee Retention Credit (ERC) requires being keen on certain deadlines to ensure you maximize the benefits while remaining compliant.
Here are the key dates and deadlines for the nonrefundable portion of the Employee Retention Credit:
Filing Deadlines for Previous Years
If you haven't claimed the ERC for the tax years 2020 and 2021, it's not too late. The filing deadline for the 2020 tax year is April 15, 2024, while for the 2021 tax year, it's April 15, 2025.
Extended Filing Provisions
Moreover, businesses that missed claiming the credit for 2020 and 2021 have an extended opportunity to claim until April 15, 2024, or within three years from the date of their original tax return filing or two years from the date the tax was paid, whichever comes later.
Be aware that as of September 14, 2023, the processing of new ERC claims has been delayed, although claims filed before this date will continue to be processed. This delay could potentially affect all amended employment tax returns, even those without an ERC claim.
Being mindful of these deadlines is crucial to ensure timely filing and to optimize the benefits from the non-refundable portion of the ERC. We advise you to consult with a tax professional to better understand the implications and to ensure accurate compliance with the ERC guidelines.
The Bottom Line
In summary, the non-refundable portion of the Employee Retention Credit (ERC) serves as a valuable tool for reducing your federal tax liability. It effectively lowers your tax payable to zero, ensuring you won't owe additional money to the state. However, it's important to note that non-refundable tax credits don't result in a tax refund themselves.
As you navigate the ERC landscape, remember that our trusted CPA firm, Lewis CPA, boasts over 25 years of experience. Our dedicated team of experts is ready to assist you in optimizing your ERC claims while ensuring compliance with IRS regulations. Don't hesitate to reach out for expert guidance and support in harnessing the full potential of the Employee Retention Credit. Your financial well-being is our priority.