Businesses that retained and paid employees during the COVID-19 pandemic may still qualify for tax refunds by claiming the Employee Retention Credit (ERC). It’s possible because there is still time to analyze payroll records for qualifying wages paid to employees in 2020 and 2021. Even if you as an employer already filed tax returns for those periods, you should be able to claim the credit by filing amended payroll tax returns using Form 941-X.
Introduction to the Employee Retention Credit
What exactly is the Employee Retention Credit? It is a partially refundable tax credit for businesses that continued to pay their workforce while financially impacted by the COVID-19 pandemic. Some businesses may qualify to claim the credit as a result of their significant decline in gross receipts from March 13, 2020, to September 30, 2021.
Even profitable businesses that were adversely affected by the COVID-19 pandemic restrictions may still be eligible for this refundable credit, which can generate refunds of 50 to 70 percent of qualified wages and health insurance costs paid in a qualified period.
Eligible employers are allowed to claim the credit either by filing an original Form 941 employment tax return. Or, if they neglected to claim the credit, they have the option to file an amended Form 941-X for a qualifying period. The ERC is available for periods early as the first quarter of 2020 and as recent as the fourth quarter of 2021 – with some restrictions.
The ERC was first enacted under the CARES Act in March 2020 to serve as an incentive for employers to keep their workforce employed and covered by health insurance during the COVID-19 pandemic. The ERC was expanded through the Relief Act and American Rescue Plan Act of 2021 and again by the Infrastructure Investment and Jobs Act. The credit was extended to allow credits of as much as $21,000 per employee in 2021 for certain employers. What was previously an attractive incentive for some companies became an essential opportunity for a significant number of businesses.
What is the Nonrefundable Portion of the Employee Retention Credit?
For starters, it’s important to explain what a nonrefundable credit is. Essentially, a nonrefundable credit cannot generate a refund by reducing a tax liability below zero. It can reduce tax liability but stops once the tax is eliminated and cannot exceed the amount of tax you owe before applying for the credit.
The ERC’s nonrefundable portion generally represents the employer’s share of certain payroll taxes, which may include those from either Social Security or Medicare – depending on the period of the claim. For wages paid after March 12, 2020, and before July 1, 2021, the nonrefundable portion is based on the employer’s 6.2 percent share of Social Security taxes.
For wages paid after June 30, 2021, and before January 1, 2022, that portion is based on the employer’s 1.45 percent share of Medicare taxes. The nonrefundable portion of the ERC must be utilized first, thereby reducing the employer’s applicable share of tax – but not below zero.
If My Employee Retention Credit Exceeds My Tax, Do I Miss Out?
No. Employers with an ERC exceeding their applicable tax share can still benefit from the full credit as long as they file on time. The amount of ERC in excess of the nonrefundable portion is generally calculated as their refundable portion.
Unlike the nonrefundable portion, the refundable part of the ERC can reduce an employer’s total tax liability below zero. Therefore, an employer claiming the ERC on Form 941-X will likely generate a tax refund larger than the amount actually paid or assessed for a qualified period. Once you’ve submitted Form 941-X, you can verify that the IRS received the form and track your ERC refund.
It’s important to note that this tax credit is not a loan, and therefore does not need to be paid back.
When utilized, the Employee Retention Tax Credit can be a big financial boost to employers and their employees. If you’re a qualified employer, you should take advantage of this tax benefit while you still can.