The Employee Retention Credit was created in order to help business owners keep their workers employed during the difficult times the world faced during the coronavirus pandemic. As the ERC is a refundable tax credit, it can cause a lot of confusion among employers when they hear that there is a non refundable portion of the ERC. The non refundable portion of the ERC refers to the employer's portion of the Social Security Tax paid on qualified wages.
What Types of Paid Wages Qualify for ERC?
Many employers assume that qualified wages include any and all compensation received by employees. This is not the case. In general, any paid wages subject to withholding tax are going to count as qualified wages. In addition to this, healthcare expenses are also considered qualified wages. Other forms of compensation, such as parental leave, sick time, vacation time, and social security contributions, are not considered qualified wages and thus do not qualify for the ERC. It is extremely important that you only include eligible forms of wages when calculating qualified wages, as a mistake at this stage could easily cause an audit from the IRS.
What Is a Non Refundable Tax Credit?
Tax credits given by the federal government come in two forms, non refundable and refundable, and whether a tax credit is one or the other can make a substantial difference. When a tax credit is referred to as “non refundable”, it means that the amount of the credit cannot be used to increase the size of the refund you receive, and it cannot be used to create a tax refund where one did not exist previously. In other words, a non refundable tax credit cannot create a refund by lowering a tax liability below zero. A refundable tax credit is basically the opposite of this. When a tax credit is refundable, and its value is more than the taxes you owe, you will receive a refund.
What Happens If My ERC Credit Exceeds My Taxes?
When a tax credit exceeds your taxes, how it is treated is determined by whether it is a refundable tax credit or a non refundable tax credit. When a non refundable tax credit exceeds the amount of your taxes, you simply lose the overage. When it is a refundable tax credit, you will receive the difference as a refund. The latter applies when discussing the ERC, as it is a refundable tax credit.
How to File 941-X for ERC
If you have already filed taxes for 2020 or 2021, and did not claim the ERC, then you have over-reported your taxes for that time period. You may be worried that you missed your chance to receive an extremely helpful tax credit and that there is nothing you can do about it now. However, it is not too late to receive your refund. This is where form 941-X comes in.
Form 941 is used to report income taxes, Social Security tax, or Medicare tax withheld from employee's paychecks, as well as to pay the employer's portion of Social Security or Medicare tax. Form 941-X is used to amend a previously filed form 941. Using form 941-X, you are able to file amended tax returns for quarters in 2020 and 2021, allowing you to claim the ERC well after the time period for which it applies.
If you forgot to claim the ERC even though you qualified for it, there is no reason not to file form 941-X. You will be given the refund you are entitled to, which is not considered taxable income and can really help to alleviate financial losses brought on by the coronavirus pandemic.
What Is the Deadline to File 941-X for ERC?
Unfortunately, you do not have unlimited time to file form 941-X. For quarters from 2020, the deadline to file has been set as April 15, 2024. For quarters from 2021, you have a little more time, with the deadline being set as April 15, 2025. After these dates, it will no longer be possible to file form 941-X and receive the ERC, even if you are eligible for it. These dates are quickly approaching, and hiring an ERC consultant will help you to make sure you have a completed form 941-X filed before the deadline arrives.
How Much of the Employee Retention Credit Is Refundable?
With all of this talk of refundable versus non refundable, you are probably wondering just exactly how much of the ERC is refundable. Well, fortunately a vast majority of the Employee Retention Credit is refundable. The non refundable portion is only equal to 6.4% of wages, which is equivalent to the employers portion of Social Security Tax. This leaves a substantial 93.6% of the ERC to be considered refundable.
Hiring a boutique firm like Five Star ERC Experts ensures you that you are in the right hands. Our team of certified tax attorneys and tax consultants have dedicated their careers to gaining experience with the IRS and they will work closely with you every step of the way to ensure you receive your tax credit or refund.