Are you a business owner who is wondering what the non refundable portion of employee retention credit is? Well, wonder no more. The employee retention credit was introduced as a part of the CARES Act in March 2020 to help employers retain their employees during the COVID-19 pandemic. It provides a refundable tax credit of up to $5,000 per employee for eligible employers who continue to pay wages to their employees despite experiencing economic hardship due to the pandemic. However, not all portions of the employee retention credit are refundable.
The non refundable portion of the employee retention credit is the portion of the credit that cannot be refunded to the employer. This means that it can only be used to offset income tax liability and cannot be used to receive a refund from the government. The non refundable portion is calculated based on the amount of the credit that exceeds the employer’s payroll tax liability for the relevant quarter. While this may sound like a downside of the employee retention credit, it’s important to note that the credit can still provide significant tax savings to eligible employers.
So, what does this mean for you? As a business owner, it’s important to understand all aspects of the employee retention credit, including the non refundable portion, to ensure that you are taking advantage of every possible tax benefit available to you. Whether you are looking to save money on payroll taxes or simply want to ensure that you are retaining your valuable employees, the employee retention credit is definitely something worth looking into.
Definition of Non-Refundable Portion
The Employee Retention Credit (ERC) is a tax credit that was created to encourage employers to keep their employees on payroll during the COVID-19 pandemic by offering them a credit against their payroll taxes. This credit can be claimed by eligible employers who operate a trade or business during the 2020 or 2021 tax year, and have experienced either a full or partial suspension of their operations due to government orders, or a significant decline in gross receipts.
While most of the ERC is a refundable credit, there is a non-refundable portion that employers need to be aware of. The non-refundable portion is the amount of the credit that exceeds the employer’s payroll taxes for any calendar quarter. In other words, if the ERC is greater than the employer’s payroll taxes for a particular quarter, the excess is considered non-refundable.
For example, if an employer was eligible for an ERC of $10,000 in Q2 2020 but only had $8,000 in payroll taxes for that quarter, they would receive a refund of the excess $2,000 ($10,000 – $8,000). However, if they were eligible for an ERC of $10,000 but had $12,000 in payroll taxes for that quarter, they would only be able to claim a credit of $10,000, and the remaining $2,000 would be non-refundable.
Calculation of Employee Retention Credit Components
When calculating the Employee Retention Credit (ERC), it is important to understand the different components that make up the credit. These components include the qualified wages and the non-refundable portion.
- Qualified Wages: This component refers to the wages paid to qualifying employees during the applicable period. These wages are eligible for the credit, up to a maximum of $10,000 per employee, for a total credit of $5,000 per employee over two quarters.
- Non-Refundable Portion: This component refers to the portion of the credit that cannot be refunded. The non-refundable portion is equal to 50% of the qualified wages for each employee.
Let’s take a closer look at the non-refundable portion of the ERC. As mentioned, this portion represents 50% of the qualified wages for each employee. However, it is important to note that this portion is not actually refundable, meaning it cannot be claimed as a refund if the credit amount exceeds the employer’s total liability for Social Security taxes.
For example, let’s say an employer is eligible for a $5,000 ERC based on $10,000 of qualified wages paid to a qualifying employee. The non-refundable portion of this credit would be $2,500 (50% of $5,000). If the employer’s total liability for Social Security taxes during the quarter is only $2,000, they would only be able to claim $2,000 of the ERC, not the full $5,000. The remaining $3,000 would be non-refundable and could not be claimed as a refund.
| ERC Calculation Example | Amount |
|---|---|
| Qualified Wages Paid to Employee | $10,000 |
| Maximum ERC (50% of $10,000) | $5,000 |
| Non-Refundable Portion (50% of Maximum ERC) | $2,500 |
| Employer’s Total Liability for Social Security Taxes | $2,000 |
| ERC Amount Claimed | $2,000 |
Understanding the components of the ERC and how they are calculated is essential for employers looking to take advantage of this credit. By understanding the non-refundable portion of the credit, employers can make informed decisions about their payroll and tax liabilities.
Eligibility Criteria for Employee Retention Credit
As an employer, you may qualify for the Employee Retention Credit (ERC) if your business was negatively impacted by the COVID-19 pandemic. To qualify, certain criteria must be met:
- Your business was fully or partially suspended due to government orders related to COVID-19, or your gross receipts for a quarter in 2020 were less than 50% of the gross receipts for the same quarter in 2019
- You maintained an average full-time employee count that was lower in 2020 than in 2019 (some exceptions apply for businesses with fewer than 100 full-time employees)
- Your business did not receive a Paycheck Protection Program (PPP) loan in the same quarter as claiming the ERC (exceptions apply for certain periods in 2021)
The third eligibility criterion has a non-refundable portion, meaning that even if you don’t qualify for the full ERC, you may still be able to claim a portion of it. This non-refundable portion is calculated as 50% of the qualified wages paid by the employer during the first two quarters of 2021, up to a maximum of $10,000 per employee (so the maximum non-refundable credit per employee is $5,000). This means that if you have an eligible employee and you paid them $10,000 in qualified wages during the first two quarters of 2021, you may be able to claim a non-refundable credit of $5,000 for that employee.
Other Criteria to Consider
It’s important to note that the ERC has various other criteria to consider, including which wages qualify and how to calculate the credit. Additionally, certain employers are ineligible for the ERC, such as government entities and businesses that received a Shuttered Venue Operators Grant.
Qualified Wages Table
| Period | Maximum Qualified Wages per Employee |
|---|---|
| March 12 – December 31, 2020 | $10,000 (for all quarters combined) |
| January 1 – June 30, 2021 | $10,000 per quarter |
| July 1 – December 31, 2021 | $10,000 per quarter |
It’s important to consult with a tax professional or employment law expert to determine your eligibility for the ERC and to properly calculate the credit based on your specific business circumstances.
Changes to Employee Retention Credit under the CARES Act
The Employee Retention Credit is part of the CARES Act, a law that was passed to provide economic relief to individuals and businesses affected by the COVID-19 pandemic. The Employee Retention Credit is a refundable tax credit that incentivizes business owners to keep their employees on the payroll. The credit is available to employers who have experienced a significant decline in gross receipts or have been fully or partially suspended due to government orders related to COVID-19. The credit was originally set to expire on December 31, 2020, but it was extended until December 31, 2021 by the Consolidated Appropriations Act, 2021.
Non-Refundable Portion of Employee Retention Credit
- The Employee Retention Credit is a refundable tax credit, which means that if the amount of the credit exceeds the employer’s payroll taxes, the employer will receive the excess amount as a refund.
- However, under the CARES Act, there is a non-refundable portion of the Employee Retention Credit that is equal to the amount of the credit that exceeds the employer’s payroll taxes for the calendar quarter.
- This non-refundable portion can be carried forward to future calendar quarters and used to offset the employer’s payroll taxes in those quarters.
| Quarter | Maximum amount of Employee Retention Credit per employee per quarter | Maximum amount of non-refundable portion of Employee Retention Credit per employee per quarter |
|---|---|---|
| Q2 and Q3 of 2021 | $7,000 | $7,000 |
| Q4 of 2021 | $7,000 | $0 |
It’s important to note that the non-refundable portion of the credit applies to each employee separately. This means that if an employer receives the maximum credit of $7,000 per employee per quarter, but the payroll taxes for that quarter are only $5,000 per employee, then $2,000 of the credit will be non-refundable. However, this $2,000 can be carried forward to future quarters and used to offset the employer’s payroll taxes in those quarters.
How to Claim Employee Retention Credit
As an employer, you may be eligible for the Employee Retention Credit (ERC), which is designed to help businesses that bled revenue due to the COVID-19 pandemic. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the ERC allows eligible employers to claim a refundable tax credit equal to 50% of the qualified wages they pay to employees. However, to claim the credit, you need to meet certain requirements and follow specific procedures. Here’s how to claim the ERC:
1. Determine your eligibility
To claim the ERC, you must meet certain eligibility criteria, including:
- Your business must have operated during the calendar year 2020 or 2021.
- Your business must have experienced a full or partial suspension of operations due to a COVID-19-related government order, or a significant decline in gross receipts compared to the same quarter in the previous year.
- Your business must have less than 500 employees.
If you meet these criteria, you may be eligible for the ERC. Consult with your tax advisor to determine your eligibility and calculate your credit amount.
2. Calculate your credit amount
The ERC is calculated based on the qualified wages paid to employees during the eligible period, which can be either 2020 or 2021, depending on the quarter in which your business was affected by COVID-19.
The maximum credit amount is $5,000 per employee for 2020 and $7,000 per employee for each quarter of 2021. The credit can be claimed against the employer’s share of Social Security tax and other payroll taxes.
3. Claim the credit on your tax return
To claim the ERC, you need to report it on your federal tax return, using Form 941 or Form 941-PR for each quarter that you are eligible. These forms will enable you to reconcile the taxes you owe with the credits you can claim.
You can apply the credit against the employment taxes you owe for the same quarter, and any excess can be refunded to you. If you prefer, you can file an amended tax return for the eligible period to claim the credit.
4. Understand the non-refundable and refundable portion
It is important to note that while the ERC is a refundable tax credit, there is a non-refundable portion that is subject to recapture. If you claim the ERC based on the wages you paid in a quarter and later realize that you were not eligible for the credit, you will have to repay the non-refundable portion of the credit.
Here is a simple table to help you understand the non-refundable and refundable portions of the ERC:
| Eligibility Criteria | Non-Refundable Portion of Credit | Refundable Portion of Credit |
|---|---|---|
| 2020 Eligibility | 50% of qualified wages | 50% of qualified wages |
| 2021 Eligibility (Q1 and Q2) | 70% of qualified wages | 30% of qualified wages |
| 2021 Eligibility (Q3 and Q4) | 40% of qualified wages | 60% of qualified wages |
In summary, the ERC can be a valuable source of financial relief for eligible employers affected by the pandemic, but it is essential to understand the eligibility criteria and comply with the claiming procedures. Consult with your tax advisor to determine your eligibility and ensure that you claim the credit correctly.
Impact of Additional COVID-19 Stimulus on Employee Retention Credit
The Employee Retention Tax Credit (ERC) is a provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March 2020. The ERC is a refundable tax credit designed to provide financial assistance to businesses affected by COVID-19 that maintain their employee retention. The credit applies to eligible employers who paid qualified wages from March 2020 through December 2020. The credit was later extended through December 2021 by the Consolidated Appropriations Act. In March 2021, the American Rescue Plan was passed, which expanded the ERC and made it available to more employers.
- The American Rescue Plan
- Eligibility
- Amount of Credit
- Advance Payment
The American Rescue Plan extended the ERC through the end of 2021 and made changes to the criteria that allowed more employers to qualify for the credit. The following changes are included in the new bill:
The bill expands eligibility for the credit by decreasing the gross receipts decline threshold, which is the measure of business decline used to determine eligibility. Employers will qualify if they experience a gross receipts decline of only 20% compared to a decline of 50% required initially. This makes many more employers eligible for the credit and provides additional assistance to those who need it most.
The bill increases the maximum credit amount from $5,000 to $28,000 per employee, per year. This means eligible employers can now receive a more substantial credit for retaining their employees.
The bill also allows eligible employers with less than 500 employees to receive an advance payment of their credit. The advance payment is calculated based on the applicable quarter’s estimated credit. This allows businesses to receive the credit more quickly and helps with cash flow.
With the changes brought about by the American Rescue Plan, the ERC has become a more significant benefit for businesses that want to retain their employees and recover from the effects of the pandemic. It provides financial assistance to businesses in a time when many are struggling, and the changes to eligibility and credit amounts make it more accessible and beneficial to those who need it most.
| Period | Credit for Wages Paid |
|---|---|
| March 13, 2020 – December 31, 2020 | 50% up to $10,000 per employee |
| January 1, 2021 – June 30, 2021 | 70% up to $10,000 per employee per quarter |
| July 1, 2021 – December 31, 2021 | 70% up to $10,000 per employee per quarter |
The table above shows the credit amount available during different periods. For wages paid from March 13, 2020, through December 31, 2020, the credit is 50% up to $10,000 per employee. For wages paid between January 1, 2021, and June 30, 2021, the credit increased to 70% up to $10,000 per employee per quarter. The credit remains at the same level for wages paid from July 1, 2021, through December 31, 2021.
Common Errors to Avoid When Applying for Employee Retention Credit
If you’re a business owner, the Employee Retention Credit (ERC) could be an excellent way to help keep your business afloat during uncertain times. However, to avoid any complications or mistakes, it’s important to know what constitutes the non-refundable portion of the credit.
- Claiming the ERC on employees who were paid with forgiven Paycheck Protection Program (PPP) funds. If you received PPP funds, you are not allowed to claim the ERC on those same wages.
- Claiming the ERC on wages that were paid with a small business loan that was subsequently forgiven by the Small Business Administration. Any wages paid with forgiven small business loans cannot be used to claim the ERC.
- Claiming the ERC on wages paid to family members who own the business. If you have family members who own more than 50% of the business, they are not eligible to have their wages included in the calculation for the ERC.
The Non-Refundable Portion of the Employee Retention Credit
The non-refundable portion of the ERC is the amount of the credit that exceeds the employer’s share of Social Security tax for any given quarter. For example, if you have a $12,000 credit for a given quarter and have a $8,000 employer share of Social Security tax liability for that same quarter, you would be entitled to $4,000 of the ERC ($12,000 – $8,000 = $4,000).
To calculate the non-refundable portion of the credit, employers must first determine their total qualified wages and health plan expenses for the quarter, then subtract any amounts claimed for PPP loan forgiveness.
| Quarter | Maximum Credit | Qualified Wages and Health Plan Expenses | Employer’s Share of Social Security Tax Liability |
|---|---|---|---|
| Q1 2021 | $7,000 per employee per quarter | Up to $10,000 per employee per quarter | 6.2% of qualified wages, up to $10,000 per employee per quarter |
| Q2 2021 | $7,000 per employee per quarter | Up to $10,000 per employee per quarter | 6.2% of qualified wages, up to $10,000 per employee per quarter |
It’s crucial to carefully review the guidelines and regulations of the ERC not only to maximize your credit but also to avoid any costly mistakes or penalties.
What is the Non Refundable Portion of Employee Retention Credit?
1. What is the non refundable portion of employee retention credit?
The non refundable portion of employee retention credit is an amount that cannot be used to offset payroll taxes but can be carried forward to offset future payroll taxes.
2. How is the non refundable portion calculated?
The non refundable portion is generally equal to the amount of the employee retention credit that exceeds the employer’s payroll tax liability.
3. Can the non refundable portion be claimed on an amended tax return?
No, the non refundable portion cannot be claimed on an amended tax return. It can only be claimed on the original tax return.
4. Does the non refundable portion expire?
No, there is no expiration on the non refundable portion of employee retention credit. It can be carried forward indefinitely.
5. Can the non refundable portion be used to offset income tax liability?
No, the non refundable portion can only be used to offset payroll tax liability.
6. Are there any restrictions on how the non refundable portion can be used?
No, there are no restrictions on how the non refundable portion can be used. It can be used to offset any future payroll tax liability.
Closing Thoughts
We hope that this article has helped you understand what the non refundable portion of employee retention credit is. Remember that while it cannot be used to offset payroll taxes, it can be carried forward indefinitely to offset future payroll tax liability. Thank you for reading, and please visit us again for more helpful information!