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How To Apply For A Federal Government Tax Refund?

During the lockdown, the federal government implemented the Coronavirus Aid, Relief and Economic Security Act (CARES), under which it introduced the Employee Retention Credit (ERTC), a facility for small businesses. This relief provision for companies is a refundable payroll tax credit meant for the paid “qualified wages” for full-time retained employees from 13th March 2020 to 31st December 2020. Implementing ERTC for tax credit businesses was to encourage the employers to maintain employees’ payroll, even when they were not working in the covered period because of ill effects faced during the COVID outbreak. Let’s understand as an employer how you can get a tax refund for the updated credit facility. 

How Does A Qualified Employer Claim Qualified Wages Employee Retention Credit?

Eligible employers have to report their total qualifying wages to get Employee Retention Credit (ERTC) for each calendar quarter. They need to do this on their federal employment tax returns on Form 941, Employer’s Quarterly Federal Tax Return. Also, employers don’t consider any qualified sick leave and family wages for which they get entitled to a credit under the FCRA on form 941. Form 941 is required to report social security and income, with Medicare taxes withheld by employers from employees’ wages and their share of Medicare tax. 

With the anticipation to get the ERC, the eligible employers can provide qualified wages through either:

  1. Accessing the federal employment taxes, like the withheld taxes required for depositing with the IRS.
  2. Or requesting a credit advance from the IRS for the credit amount not funded through accessing federal tax deposits, filing Form 7200, Advance Payment of Employer Credits due to COVID-19. 

Does An Eligible Employer Get An Advance Of Employee Retention Credit For Funding Wage Payment Without Sufficient Federal Employment Taxes?

Yes, they can. The quarterly employment tax returns don’t get filed until employers pay the qualified wages. Many eligible employers might not be left with adequate federal employment taxes besides depositing IRS for funding qualified wages through minimizing the deposited amount, generally after considering the permitted deferral of employer’s social security tax share under section 2302 of the CARES Act. The IRS has a process to obtain a small advance from the refundable credits. 

Then, the qualified employer can defer the payment and deposit of their social security tax under section 2302 of the CARES Act. They might do so before lessening any warranties while anticipating the credit. Suppose the excess employment tax deposits are less than eligible wages after considering any deferral for the employer’s social security tax. In that case, the eligible employer can file Form 7200, Advance Payment of Employer Credits Due COVID-19. This helps the employer claim advance credit for the left qualified wages and for which they don’t have adequate deposits for employment tax. 

When an eligible employer minimizes the required federal employment taxes, otherwise due on wages, paid in the same calendar quarter to the employees while anticipating to get the credits and they didn’t pay the qualified salaries over the same amount, then they won’t be able to file Form 7200. 

If the company files Form 7200, it would have to reconcile advance credit and the deposits with qualified wages on Form 941, the Employer’s Quarterly Federal Tax Return (or any other tax return for federal employment like the Form CT-1 or Form 944), beginning with Form 941 for the second quarter, it would have a federal employment tax underpayment for the tax refund quarter. 

How A Qualified Employer Obtains Form 7200?

ERC credit qualified employers can obtain the Advance Payment of Employee Credits Due to COVID-19 (Form 7200) online on the IRS official website. After completing the form, they can fax it to 855-248-0552. After 2nd July, the employers become eligible to claim a minimum advance amount of $25 on Form 7200. If Form 7200, which requests payment of less than $25 or advance, does not get processed, taxpayers can claim credits less than $25 on Form 941. As an employer, you should hire a professional CPA to assist you with this claim and maximize cost savings for businesses.  

How To Claim The ERTC Refund Through Form 941-X?

You’ve determined your company’s eligibility for the ERTC refund, and you’ve calculated the ERTC 2020 from the qualified health plan expenses and wages. So, how would it be possible to submit the paperwork and claim a credit if you’ve already filed Form 941? Here, you would need to file form 941-X or amended 941. 

With the below-provided details, you get to know briefly about the necessary line items that must be completed and some tips that you should be aware of. 

Form 941-X Preparation

You have to open a separate Form 941-X for the Form 941 that you have corrected. Complete company information on all pages and the information for the “Return that you’re correcting” in the upper right corner while entering the date where you discovered errors. 

For claiming the Employee Retention Tax Credit as Form 941-X refund:

  • Check on Part 1, 2nd Box.
  • Check on Part 2, Box no. 5d

Line 18 represents the total ERTC credit amount as negative – Non-refundable Portion and Line 26 – Refundable Portion:

  1. Worksheet 1 (included in the Form 941 instructions) calculates the Refundable and Non-refundable ERTC Portion. 
  2. The non-refundable ERTC portion is the total amount applied against the 6.2% of the Employer’s Social Security tax share. 

The balance remaining would be the Refundable Portion.

Note: The total ERTC tax credit would be refundable through Form 941-X as the 6.2% of Employer’s Social Security tax share got paid with original Form 941 upon filing. 

The qualified wages for employee retention credit would be reported on Form 941-X, Line 30. The eligible expenses for the health plan allocable to employee retention credit get reported on Line 31, Form 941-X. The Line 30 and Line 31 sum multiplied with a credit percentage of either 50% (2020) or 70% (2021) must be equal to the total ERTC on Lines 18 and 26 (without considering any other factors). 

Line 37 is on ERTC requirements to describe events causing overreported amounts (the credit eligibility). The explanations must also offer important details and must have these elements: 

  • Date when you saw the error
  • Line number(s) affected in Form 941-X
  • Error cause
  • Difference (amount of the error)

Other Things To Consider 

Typically, you can correct the over-reported taxes (claim ERTC tax credit) on the previously filed Form 941 if you file Form 941 within three years of filing the Form 941-X.

You should also check with the payroll provider before filing Form 941-X to maximize tax reduction.

Updated IRS Guidance To Claim ERTC

On 4th August, the IRS issued the latest guidance on the ERTC. It included guidance for employers paying qualified wages after 30th June 2021 and earlier than 1st January 2022 with issues applying to the ERTC in 2021 and the previous year.

The 2021-49 notice states prior guidance about the ERTC 2021 issues in the 2021-20 Notice and 2021-23 Notice. The guidance has addressed some changes stated by the American Rescue Plan Act (ARPA) for the ERTC in the 2021 third and fourth quarters. Such changes, among other things, also include:

  • Expanding the definition of eligible employers for including “recovery startup businesses.”
  • Modification of qualified wages definition for “employers who are financially distressed.”
  • The employee retention credit doesn’t apply for the qualified wages considered the payroll costs with a shuttered venue grant under section 324 of Economic Aid for affected small businesses. 
  • Venues Act and Nonprofits, or restaurant revitalization grant under ARPA section 5003. 

Reporting

The eligible employers need to report their qualified wages and general health insurance per quarter on employment returns (generally, Form 941, Employer’s Quarterly Federal Tax Return) for the applicable period. To process claims, you would require assistance from a professional CPA. However, small firms are often confused on “how to find the best CPA near me?”

When the reduction in employment tax and employer’s deposits is not ideal for covering credit, some employers will get an advance payment through the IRS after submitting the Advance Payment of Employer Credits Due to COVID-19 (Form 7200). 

Employers need to consult with professional tax and legal counselors to determine whether the organization needs the ERTC, as different rules apply for 2020 and 2021. They can also get help through the ERTC calculator for an approximation. 

To release the burden from your end, you can consult with professionals from Business Tax Benefits and reduce administrative and legal obligations. The tax return forms with the latest guidelines are available on the IRS official website. So, you can go through them as well. However, seeking professional help is always beneficial.  

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