Employee Retention Credit: Non-Repayment
The Employee Retention Credit (ERC) is a refundable tax credit designed to help businesses retain employees during the COVID-19 pandemic. The credit is available to businesses that experienced a decline in gross receipts due to the pandemic, and it can be used to offset payroll taxes.
The ERC is not taxable, which means that businesses can keep the full amount of the credit without having to pay taxes on it. This makes the credit a valuable tool for businesses that are struggling to make ends meet during the pandemic.
- 2020: Businesses may claim up to $5,000 per employee for the full year.
- 2021: Businesses may claim up to $7,000 per employee per quarter, with a maximum credit of $28,000 per employee.
- 2022: Businesses may be eligible for the ERC only for the first half of the year, with a maximum credit of $5,000 per employee.
Year Maximum Credit per Employee 2020 $5,000 2021 $28,000 2022 (first half) $5,000 Non-Refundable Tax Credit
The nonrefundable portion of the employee retention credit (ERC) is a tax credit that businesses can claim for wages paid to employees during the COVID-19 pandemic. The credit is nonrefundable, meaning that it can only be used to reduce tax liability, not to generate a refund.
The ERC was created by the CARES Act, which was passed in March 2020. The credit was originally available for wages paid between March 13, 2020, and December 31, 2020. The Consolidated Appropriations Act, which was passed in December 2020, extended the credit through June 30, 2021.
The ERC is available to businesses that meet certain criteria, including:
- The business must have experienced a decline in gross receipts of at least 50% in a calendar quarter in 2020 or 2021 compared to the same quarter in 2019.
- The business must have maintained the same number of employees or increased the number of employees during the period for which the credit is claimed.
- The business must pay qualified wages to employees.
The amount of the ERC is equal to 50% of qualified wages paid to employees during the period for which the credit is claimed. The maximum amount of the credit is $5,000 per employee per quarter.
Businesses can claim the ERC on their federal income tax returns. The credit is nonrefundable, meaning that it can only be used to reduce tax liability, not to generate a refund.
Quarter Qualifying Period Eligible Employees 2020 Q2 March 13 – June 30, 2020 Up to 100 employees 2020 Q3 July 1 – September 30, 2020 Up to 100 employees 2020 Q4 October 1 – December 31, 2020 Up to 100 employees 2021 Q1 January 1 – March 31, 2021 Up to 500 employees 2021 Q2 April 1 – June 30, 2021 Up to 500 employees The Non-Refundable Portion of Employee Retention Credit
The Employee Retention Credit (ERC) is a refundable tax credit created by the CARES Act in 2020 to help businesses keep employees on the payroll during the COVID-19 pandemic. Initially, the credit was fully refundable. However, later legislation established that a portion of the credit is non-refundable.
Calculation of Non-Refundable Credit
- For 2020, the non-refundable portion is 50% of the total credit amount.
- For 2021, the non-refundable portion is 70% of the total credit amount.
Eligibility for Refundable and Non-Refundable Credit
Year Refundable Credit Non-Refundable Credit 2020 50% 50% 2021 30% 70% Employers can use the non-refundable portion of the credit to offset their income tax liability, but it cannot result in a refund.
Impact on Tax Liability
The non-refundable portion of the Employee Retention Credit (ERC) impacts the business’s tax liability in several ways:
- Reduces Taxable Income: The non-refundable portion of the ERC is deducted from the business’s gross income, reducing its taxable income.
- May Reduce Tax Payments: The reduction in taxable income can lead to a decrease in the amount of taxes owed. However, it’s important to note that the ERC is not a direct tax refund and does not guarantee reduced tax payments.
- Potential Future Tax Liability: If the business’s tax liability is reduced due to the ERC, it may have to pay additional taxes in the future if the credit is recaptured.
The table below summarizes the impact of the non-refundable portion of the ERC on tax liability:
Tax Impact Non-Refundable ERC Reduction in taxable income Yes Potential reduction in tax payments Yes Potential future tax liability (recapture) Yes Well, that’s a wrap on the non-refundable bit of the Employee Retention Credit! Hope it made sense and didn’t leave you scratching your head. If you have any other questions, feel free to drop me a line. In the meantime, thanks for hanging out with me today! Be sure to check back later for more money-saving tips, tricks, and insights. Until next time, keep hustling and making those smart financial decisions!