Employee Retention Credit Calculation - How to Calculate

December 14, 2021

Employee Retention Credit Calculation

The pandemic situation keeps on bringing in new challenges to small businesses and because of this, the government has come forward to offer financial resources to these businesses. 

Among so many financial resources, ERC ( Employee Retention Credit ) established in the CARES Act is considered to be one of the significant contributions from the government so far. 

From the initial time, this ERC was put under the action, there have been some changes and expansions with this program. The first was under the Consolidated Appropriations Act, 2021, and later was under the American Rescue Plan Act. 

However, the overall ERC program is pretty complicated. Therefore, with the help of this blog post, you’ll know how the overall credit works, calculate employee retention credit, eligibility requirements, and many more. This will allow you to understand whether ERC is better for your business or not.

Employee Retention Credit: What is it?

Employee Retention Credit (ERC) is a refundable payroll tax credit that’s available for employers who are under the criteria of the Consolidated Appropriations Act, 2021. 

If they are eligible for ERC, they might: 

For Tax Year 2021

  • Receive a credit of around 70% (for up to $10,000) from each of the employee’s wages.
  • Assess group health plan fees to be qualified earnings, even if an employee receives no additional compensation.

For Tax Year 2020

  • Receive a credit of around 50% (for $10,000) from each of the employee’s wages.
  • Assess group health plan fees to be qualified earnings, even if an employee receives no additional compensation.

How to Calculate Employee Retention Credit

A simple example can be one of the easiest approaches to illustrate this credit estimation. However, you should still consult with your accountant before determining the appropriate erc calculation for your situation.

In this sample, let’s assume your business has fewer than 500 employees. 

Grass Receipts Test

2021

2019

%Obtained

Q1

$80,000

$140,000

60.0%

Q2

$85,000

$140,000

63.3%

This business will surely qualify for the ERC 2021 program in both Q1 and Q2. If its gross receipts for each quarter in 2021 are less than 80% of what they were in 2019.

Let us have an estimation of our credit. The table below details the wages paid to each employee during the business’s eligible period.

Employee

W(Q1)

W(Q2) 

The Total Amount of W (Wages) Paid

A

$2,000

$7,000

$9,000

B

$7,000

$8,000

$15,000

C

$10,000

$10,000

$20,000

Again, your credit is 70 percent of qualifying salaries, with a quarterly cap of $10,000.

Employee

The Total Amount of Wages Paid

The Amount of Credit 

A

$9,000

$6,300

B

$15,000

$10,500

C

$20,000

$14,000

As shown in the above chart, the credit in this overall scenario is $30,800. Therefore, in this business sample, no employees have been capped.

Who Qualifies?

The employees who belong to private businesses and also the tax-exempt organizations and have carried out a business or trade during the calendar year are eligible for this ERC.

Moreover, the employees who suffered a significant loss or decline in their gross receipts during their calendar quarter are also eligible for ERC.

How Do You Become an Eligible Employer?

Your position as an “eligible employer” is determined by the time period. 

You need to carry on a business or trade during the period March 13, 2020, to December 31, 2020, and state whether it:

  • Was suspended in part or entirely due to COVID
  • Experienced a severe fall in gross receipts comparable to the calendar quarter in 2019.

Moreover, government and state subdivisions aren’t eligible to participate in the 2020 ERC.

If you were self-employed, then you won’t be eligible for 2020 ERC. However, if you employ others, you may be eligible to claim the ERC earnings that were paid to your employees.

Between January 1, 2021, and June 30, 2021, you must have engaged in commerce or business or that:

  • Was suspended in part or entirely due to COVID
  • Experienced a severe fall in gross receipts comparable to the calendar quarter in 2019.

However, 

  • If you weren’t in any trade or business in 2019, then you may use the year 2020 as a reference.
  • The 2021 ERC does not apply to government or state subdivisions. However, tax-exempt universities, colleges, and even hospitals are eligible.
  • Self-employed individuals aren’t eligible for 2021 ERC. However, if you hire others, you may be eligible for the ERC earnings given to those employees.

What Wages Qualify?

Compensation and wages paid by a company to full-time employees during the relevant quarter are known as “qualified wages”. 

These wages include any health plan expenses incurred by the employer that are correctly allocated to the wages.

So, for ERC in 2021, the credit stands at 70% of eligible wages or qualified wages up to a quarterly cap of $10,000, or a max of $7,000 for every employee each quarter for the remainder of 2021. Thus, an employee may claim up to $7,000 each quarter or up to $28,000 in 2021.

Gross Receipts Test Example

Employers may be eligible for the ERC in 2021 if the gross revenues for a calendar quarter in 2021 are less than 80% of their gross receipts for the same calendar quarter in 2019 (a fall of more than 20%). Employers may need to choose a different quarter to calculate these gross receipts. 

Tipped Wages: Are They Included in Qualified Wages?

The IRS acknowledges the tips that are received by any employees (mainly from the customers) are generally known as “qualified wages,” citing the inclusion of any sort of cash tips that are greater than $20 per month as wages and compensation are also included as qualified wages.

How do the Credits Work?

The ERC is entirely refundable and this refundable portion of employee retention credit is applied to your contribution of the employee’s Social Security taxes. This implies that the credit will function like an overpayment which will be repaid to you after your part of those taxes is deducted.

In simple words, you can say, if the credit surpasses your total Social Security liability in almost any quarter, the difference is returned to you.

How Does a Business Claim this Tax Credit?

To receive the Employee Retention Credit (ERC), you first need to compute the total qualified wages and then the related health insurance expenditures for each quarter and deduct them from your quarterly deposit. If you have already submitted your 2020 taxes, you may claim the credit immediately. 

Moreover, if you are qualified as a small employer, you may request payment of the credit in advance by completing Form 7200. Advance payments are not available to those employers who have more than 500 employees.

Bottom Line

The new ERC can surely prove to be pretty helpful, however, ensure that when you are calculating through your ERC credits, consult with your accountant for a precise and flawless calculation.

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