What is the Non-Refundable Portion of the Employee Retention Credit (ERC)?

Overview of the Non-Refundable Portion of the ERC

This article will discuss the Non-Refundable Portion of the Employee Retention Credit.

The Employee Retention Credit (ERC) was a payroll tax credit that was available to eligible employers to help retain employees during the COVID-19 pandemic. The ERC was authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020 and was extended and expanded several times before expiring in September 2021.

The ERC provided a credit of up to $7,000 per employee per quarter to eligible employers. The credit was taken against the employer’s share of Social Security taxes. If the credit exceeded the employer’s share of Social Security taxes, the excess was treated as an overpayment and refunded to the employer.

Non-Refundable Portion of the ERC

While a portion of the ERC could be refunded to employers if it exceeded their payroll tax liabilities, there was also a non-refundable portion. Here are some key details on the non-refundable portion:

Medicare Tax

The ERC could only be claimed against the employer’s share of Social Security taxes, not Medicare taxes. The Medicare tax rate is 1.45% for both employees and employers. This portion was not refundable if it exceeded the employer’s Medicare tax liability.

Taxable Wages Cap

The ERC credit was calculated based on qualified wages paid to employees. However, it could only be claimed on the first $10,000 in wages per employee per quarter. Any qualified wages above $10,000 per employee did not generate an ERC. This effectively capped the refundable portion of the credit.

Credit Carryforward

If an employer’s ERC exceeded its Social Security tax liability for a quarter, the excess was treated as an overpayment to be refunded. However, any excess ERC that was attributable to the Medicare tax or taxable wages cap could not be refunded. Instead, it was carried forward to offset the employer’s share of Social Security taxes in future quarters.

This carryforward credit was non-refundable – if the business closed or no longer qualified for the ERC, any remaining carryforward credit would be lost. It could not be refunded to the employer.

Strategies Related to the Non-Refundable Portion

The existence of a non-refundable component of the ERC created some strategic planning considerations for businesses. Here are some strategies employers use to maximize the benefits of the credit given the non-refundable limitations:

Managing Taxable Wages Per Employee

Because the credit only applied to the first $10,000 in wages per employee, some employers strategically managed earnings for employees who earned over $10,000 per quarter.

For example, they could carefully time bonuses or overtime pay so an employee’s total taxable wages stayed under $10,000 in a quarter to maximize the credit. The IRS imposed some rules to limit the manipulation of wages solely to maximize ERC credits.

Claiming Credits as Quickly as Possible

Since excess credits could only be carried forward for a limited time, employers had an incentive to claim credits as quickly as possible before the expiration of the program. Accelerating credit claims reduced the risk of losing non-refundable carryforward amounts.

Considering Company Structure

The structure of a company impacted how much of the ERC would be non-refundable. For example, S-Corps only paid themselves wages subject to Medicare/Social Security taxes on certain distributions. This resulted in a higher proportion of non-refundable credit for them compared to C-Corps.

Benefitting from Legislative Extensions

Legislative extensions of the ERC to 2021 enabled some employers to claim credits on prior period wages they may have missed. This provided opportunities to claim credits against new payroll tax liabilities, recovering some previously non-refundable amounts.

Summary

In summary, the non-refundable portion of the ERC consisted of:

  • The Medicare tax on employee wages, which could not be credited
  • The credit amount for qualified wages above $10,000 per employee per quarter
  • Any carryforward credit that exceeded future payroll tax liabilities

Understanding these limitations was important for employers in maximizing the cash flow benefits of the ERC. Though much of the ERC was refundable, planning around the non-refundable components was an essential part of ERC tax planning and compliance.

Conclusion

The ERC provided crucial cash flow relief to companies during an economically challenging time. Understanding the nuances of the non-refundable components of the credit enabled strategic tax planning to maximize its benefits within the confines of the legislation.

Here is an FAQ section to supplement the article:

Frequently Asked Questions

What types of taxes could the ERC be claimed against?

The ERC could only be claimed against the employer’s share of Social Security taxes. It could not be claimed against Medicare taxes or income taxes.

Was there a limit to the amount of credit that could be claimed per employee?

Yes, the credit only applied to the first $10,000 in wages per employee per quarter. Any wages above this amount did not generate a credit.

What happens if the ERC exceeds the employer’s payroll tax liability?

If the ERC exceeded the employer’s share of Social Security taxes in a quarter, the excess was treated as an overpayment to be refunded to the employer. However, any excess related to Medicare taxes or the $10,000 wage limit per employee was non-refundable.

Could excess credits be carried forward?

Yes, any excess credit could be carried forward to offset the employer’s share of Social Security taxes in future quarters, but this carryforward credit was non-refundable.

Did the ERC cover health insurance costs and retirement plan contributions?

No, the credit only applied to cash wages subject to Social Security taxes. Non-cash compensation like health insurance and retirement benefits were not included.

Were there strategies to maximize the refundable portion of the credit?

Yes, employers could time bonus payments to keep individual employee’s wages below $10,000 per quarter. Accelerating credit claims before expiration and managing company structure were also techniques used to maximize refundability.

What happened to any non-refundable credit if a company went out of business?

If a company ceased operations and no longer had a payroll tax liability, any remaining non-refundable carryforward credit was lost and could not be claimed as a refund.

Note:

Affiliate Disclaimer: From time to time, I will promote, endorse, or suggest products
and/or services for sale that are not my own. My recommendation is ALWAYS based on
My personal belief is that the product and its creator will provide excellent and valuable
information or service. This may be based on a review of that product, my personal or
professional relationship with that person or company, and/or a previous positive
experience with the person or company whose product I am recommending. In most
cases, I will be compensated via a commission if you decide to purchase that product
based on my recommendation.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top