Technically, an eligible employer’s allowable 50% employee retention credit for a calendar quarter is offset against the employer’s liability for the Social Security tax component of federal payroll taxes. That component equals 6.2% of the first $137,700 of an employee’s 2020 wages.
But the credit is a so-called “refundable” credit. That means an employer can collect the full amount of the credit even if it exceeds the aforementioned federal payroll tax liability.
The allowable credit can be used to offset all of an employer’s federal payroll tax deposit liability, apparently including federal income tax, Social Security tax and Medicare tax withheld from employee paychecks. If an employer’s tax deposit liability isn’t enough to absorb the credit, the employer can apply for an advance payment of the credit from the IRS. Your tax advisor can help you submit the correct form to the IRS.
The following example shows the mechanics of the refundable credit: Beta Corporation is an eligible employer. Beta paid $20,000 of eligible wages and is, therefore, entitled to a 50% employee retention credit of $10,000. The company has an upcoming quarterly federal payroll tax deposit obligation of $8,000, which includes taxes withheld from its employees on wage payments made during that quarter. Beta can keep the entire $8,000 as part of its allowable 50% employee retention credit — and then the company can file a request for an advance payment of the remaining $2,000 credit.
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