For most companies, the credit could be claimed on salaries until September. From now on, the only way to apply for the ERC is to file an amended Form 941X (Quarterly Federal Payroll Tax Return) for the quarters in which the company was an eligible employer. The credit was allowed from the employer's share of social security taxes (6.2% rate) and the railroad retirement tax on all salaries and compensation paid to all employees during the quarter. Because of the complexities of eligibility for the employee retention credit, Thomson Reuters has updated the employee retention credit tool to help all employers determine if they qualify for the credit.
For most companies that take advantage of this program, refundable tax credits far exceed the payroll taxes paid by employers. Under the law, companies are entitled to a tax credit equal to 100% of the paid sick leave and paid family leave offered to employees. If the amount of the credit exceeds the company's share of its payroll taxes, the excess is reimbursed (paid) directly to the company. If the amount of the credit exceeded the employer's share of those federal payroll taxes, the excess was treated as an overpayment and was reimbursed to the employer.
However, salaries paid with the PPP loan that are forgiven are not counted as salaries that qualify for the credit. Employers who file an annual payroll tax return can file an amended return using Form 944-X (employer's adjusted annual federal tax return or request for reimbursement) or Form 943-X (adjusted federal employer tax return for agricultural employees or request for reimbursement) to apply for credits. ERC credits are calculated based on the qualifying wages paid to employees during their status as an eligible employer. The American Rescue Plan extends a number of critical tax benefits, in particular the employee retention credit and the paid leave credit, to small businesses.
An eligible employer could reduce their payroll tax deposits during the quarter by the amount of credit expected for the quarter. The employee retention credit was a refundable tax credit intended to allow small business owners to continue paying their employees during the COVID-19 pandemic. This means that the credit served as an overpayment and would be refunded to you after subtracting your share of those taxes. The credit was applied to their share of the employee's Social Security taxes and was fully refundable.