Refundable Portion of Employee Retention Credit: A Benefit For The Employer

Is The Employee Retention Credit Fully Refundable?

Yes, the employee retention tax credit was made fully refundable to provide the greatest possible financial benefit to employers affected by COVID-19.

The refundable structure allows employers to receive the maximum value of the credit even if it exceeds their federal payroll tax liabilities for a quarter.

Specifically, eligible employers could use the retention credit to offset their share of Social Security taxes owed on employee wages. If the credit exceeded the taxes owed, the IRS refunded the remaining amount.

There was no limit imposed on the refundable portion of the credit. Employers could receive a refund of 100% of excess credits beyond payroll taxes due.

By making the credit fully refundable, struggling businesses could realize immediate cash flow help to continue paying and retaining employees during the pandemic.

In summary, the refundable design maximized the assistance provided through the retention credit by ensuring employers could benefit from the full amount they qualified for.

How Does The Refundable Portion Of The Credit Benefit Employers?

  • Employers received immediate cash relief by claiming refunds of excess credits, improving cash flow.
  • Startups and unprofitable companies could now benefit despite having little or no tax liability.
  • Tax-exempt organizations like non-profits and churches became eligible for the credit.
  • No limits were imposed on the refundable amounts employers could claim.
  • Carryforward rules associated with non-refundable credits were avoided.
  • Refunds enabled quicker utilization compared to awaiting sufficient tax liability.
  • Credit amounts were not reduced due to insufficient current-year taxes owed.
  • Employers could request advance refunds of the expected credit amounts.

In summary, the refundable design maximized the tax relief and financial benefits the retention credit provided to employers of all types and sizes impacted by the pandemic.

Can Employers Receive Refunds Of The Credit Even If They Had No Tax Liability?

Yes, thanks to the full refundability of the employee retention tax credit, employers could receive tax refunds through the credit even if they had no federal income tax or payroll tax liabilities.

For example:

  • A startup with no revenue and no taxes owed could claim $5,000 in retention credits per employee and receive the full $5,000 as a refund.
  • A non-profit organization with no taxable income could qualify for refundable credits based on qualified wages paid to staff.
  • An employer that uses up tax liabilities through other deductions and credits could still get refunds from any excess retention credits.
  • Employers forecasting a tax loss for the year were still eligible for retention credit refunds.

The key was that the refund did not depend on having tax liabilities against which to apply for the credit. The full value could be unlocked as a payment from the IRS regardless of taxes owed.

This flexibility opened up meaningful relief through the refundable employee retention credit to more organizations affected by the pandemic.

What Is An Example Of An Employer Getting A Refund From The Retention Credit?

The refundable portion of the employee retention tax credit was calculated based on the amount of the credit that exceeded the employer’s share of payroll taxes owed for a quarter.

For example:

  • If an employer qualified for a $100,000 retention credit in Q2 2021
  • And they owed $80,000 in payroll taxes for that quarter
  • They could apply the credit to reduce their $80,000 tax liability to zero
  • The excess $20,000 credit beyond taxes owed represents the refundable portion
  • The IRS would refund that $20,000 excess as an overpayment

So the refundable amount equated to total qualified retention credits minus the employer portion of Social Security taxes for the quarter. Employers received any credit balance over taxes owed as a refund.

The instructions for IRS Form 941 outlined how to calculate the refundable portion when claiming the credit on the quarterly employment tax return. Tax advisors could also assist with maximizing the refundable amounts.

How Is The Refundable Portion Of The Retention Credit Calculated?

Yes, tax-exempt organizations like non-profit groups and churches qualified for the refundable portion of the employee retention tax credit just like taxable businesses.

Because these organizations do not face regular federal income tax obligations, non-refundable credits provide little benefit.

But the refundability of the retention credit enabled tax-exempt employers to claim the credit based on qualified wages paid to employees, and then receive any excess amounts over taxes owed as refunds from the IRS.

For example, a hospital or university may have $0 payroll taxes due in a quarter. But if they qualified for a $300,000 retention credit based on staff wages, they could claim the full $300,000 as a refund.

So the refundable design opened up the retention credit relief to essential non-profit service providers impacted by COVID-19 disruptions to their operations and revenue.

In summary, refundability made this tax credit an inclusive form of relief for employers across sectors, including tax-exempt organizations with no tax liability.

Do Tax-Exempt Organizations Qualify For The Refundable Credit?

Yes, the IRS permitted employers to receive advance refunds of their expected employee retention tax credits for a quarter before filing their employment tax return.

Employers could file Form 7200 to request an advance credit refund for qualified retention wages already paid to employees in a quarter.

Key facts about advanced refunds of the credit:

  • Employers must have reasonable estimates of credits expected for the quarter.
  • Form 7200 could be filed at any time before the credit claims were submitted on Form 941.
  • Advance refunds enabled quicker access to retention credit cash flow benefits.
  • The advance amounts were reconciled against actual credits claimed on the quarterly return.
  • Interest accrued on advance refunds paid out long before the return due date.
  • Only the refundable portions of the expected credit could be advanced.

Allowing retention credit refunds in advance provided quicker aid to struggling businesses through this cash flow boost during the pandemic.

Can Employers Receive Advance Refunds Of The Expected Retention Credit?

No, employers did not have to repay any portion of tax refunds properly received through the employee retention tax credit program.

As long as employers qualified for the amounts claimed based on eligible wages paid, refunds issued for the retention credit did not need to be paid back or otherwise reconciled.

Some key points regarding retention credit refunds:

  • Refunds represented the employer’s eligible excess credits over taxes owed.
  • Advance refunds were reconciled against actual credits claimed on returns.
  • As long as eligibility requirements were met, amounts did not have to be repaid.
  • The credit was made fully refundable specifically so employers could benefit from the full value.
  • The IRS did not treat refunds of the credit as improper payments requiring recoupment.
  • Tax experts recommend retaining documentation supporting eligibility in case of any IRS inquiry.

The IRS recognized refunds resulting from the employee retention credit provided essential liquidity and support to businesses negatively impacted by the pandemic.

Do Employers Have To Repay Any Portion Of Refunds Received From The Retention Credit?

Yes, the full refundability of the employee retention tax credit provided substantially more financial aid and flexibility for employers compared to non-refundable credits.

With non-refundable credits, employers can only utilize the credit to offset their federal income tax liability. Any excess credit over taxes owed is lost.

But because the retention credit was made fully refundable, struggling businesses could benefit from the total credit amounts calculated, not just limited by tax bills.

Examples of expanded aid through full refundability:

  • Startups and unprofitable businesses now qualified for relief
  • Liquidity improved by accelerating and maximizing cash flow benefits
  • More employers retained staff knowing credit values would not be reduced
  • Tax-exempt organizations could now benefit from the credit

In summary, refundability opened up expanded employer eligibility for meaningful relief offered through the employee retention credit during the pandemic.

Where Can I Find More Information About The Refundable Portion Of The Retention Credit?

Some useful resources with additional details on the refundable portion of the employee retention tax credit include:

  • IRS Form 941 instructions – Details calculating the refundable credit.
  • IRS Form 7200 – Used to claim advance refunds of expected retention credits.
  • IRS Publication 15 – Covers claiming the refundable credit on quarterly employment tax returns.
  • Journal of Accountancy article – Explains the benefit of the fully refundable design.
  • Chamber of Commerce guide – Provides retention credit refund examples.
  • AICPA outline – Summarizes how to claim and maximize refundable credits.
  • AccountingWeb article – Looks at refundability making the credit more widely usable.
  • CLA overview – Discusses qualifying for and claiming refunds of the credit.
  • Watson CPA Group analysis – Reviews optimizing and expediting refundable credit claims.

The full refundability opened up essential liquidity for employers through quick access to excess credit amounts over taxes owed.

Here are two additional resources on the refundable portion of the employee retention tax credit:

IRS FAQs with information on how refundability works for the employee retention credit.

Journal of Accountancy article explaining the refundable benefit of the employee retention credit.

Step 12: Here are two additional resources on the refundable portion of the employee retention tax credit:

IRS FAQs with information on how refundability works for the employee retention credit.


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