The pandemic has affected virtually every segment of the economy, with some areas bearing more of the brunt than others. Small businesses have been particularly hard hit, incurring significant financial losses as a result of the COVID-19 pandemic and the ensuing government shutdowns. The economy closed to varying degrees, and many businesses crumbled. Many companies were forced to reduce employees’ hours in order to keep up with rising expenses and, in many cases, were forced to lay off workers.
To combat this problem, the government enacted the Employee Retention Credit (ERC) to help support businesses that were able to retain their employees during this challenging time. The goal of the ERC is to provide financial assistance to companies that choose to continue paying their workers, even when a business has slowed down significantly. In this article, we will explain how to calculate Employee Retention Credit and how it can help small businesses recover from this economic hardship.
What is Employee Retention Credit (ERC)?
The Employee Retention Credit is a tax credit that was established to support businesses experiencing hardship in the wake of COVID-19. Qualified employers can receive up to half of the qualified wages paid to their employees for the tax year 2020. For 2021, that percentage increased to 70% of the eligible earnings paid to their employees, up from 50% in 2020. With the amount of money that’s being credited to eligible businesses, the Employee Retention Credit is a critical tool for supporting businesses during economic uncertainty.
Who Qualifies for the Employee Retention Credit?
Before you start calculating your ERC, it’s important to understand who qualifies for this credit. As a refundable tax credit, the ERC applies to qualified wages, which eligible employers pay to their employees. To receive the tax credit, a business must meet at least one of the following criteria:
- A business’s operations were fully or partially suspended in 2020 and/or 2021 pursuant to directives from a governmental authority that restricted business, travel, or meetings due to the pandemic.
- The business has experienced a significant decline in gross receipts.
What Are qualified wages?
Qualified wages are wages paid to an employee after March 12, 2020, and before January 1, 2021. The amount of the credit is 50% of qualified wages paid by the employer to employees during the covered period, limited to the first $10,000 in wages paid during the year for 2020 and per quarter for 2021.
The definition of qualified wages for 2020 changes slightly depending on how many employees depend on how many employees a business employed in 2019. For an eligible employer that averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for time that the employee is not providing services due to either a significant decline in gross receipts or a full or partial shutdown because of a government-mandated shutdown.
For eligible employers with less than 100 full-time employees, qualified wages are the wages paid to any employee under the same circumstances. However, it is imperative that these expenses were paid after March 12, 2020, and before January 1, 2022, as this is the period covered by the laws related to the Employee Retention Tax Credit.
It is also important to note that wages used to obtain Paycheck Protection Program (PPP) loan forgiveness can not also be used as qualified wages for the Employee Retention Credit.
How to Calculate Employee Retention Credit?
The Employee Retention Credit calculator is straightforward for experienced specialists, but it can be time-consuming because it requires a detailed understanding of the Employee Retention Credit calculation guidelines.
Determining Gross Receipts
In order to qualify for a tax credit based on a decline in gross receipts, the gross receipts for a given quarter in 2020 or 2021 must be compared to the same quarter in 2019 to determine how significant the decline is.
If an employer’s gross receipts were below 50 percent for any calendar quarter in 2020 compared to the same quarter in 2019, they could be eligible for the ERC. For 2021, the threshold is a little easier to meet. A business is eligible for the ERC if its gross receipts are less than 80 percent compared to the same quarter in 2019.
This is a payroll tax credit, which means that businesses can receive refunds for taxes already paid. All told, this payroll tax cut could provide much-needed relief to small businesses and help them keep workers on the payroll.
Things To Do When Calculating the Employee Retention Credit
According to the IRS, there are a few key steps businesses should take when calculating their Employee Retention Credit. These steps include:
Know Your Business Operations From 2020-2021
Determine whether or not your company was subject to any periods of partial or complete suspension due to governmental orders during the years 2020 or 2021.
Review Your Gross Receipts and Payroll Tax Deposits
Review and evaluate your quarterly payroll tax deposits and receipts to determine whether you are eligible for the credit. You can do this by consulting with a tax specialist.
Determine Your Qualified Employees.
Next, you’ll need to determine how many full-time employees were working for your company on average each month in the years 2019, 2020, and 2021. For the purposes of the ERC, a full-time employee is someone who works 30 hours or more per week or 130 hours or more per month.
Do the Math
To qualify for the refund based on loss of revenue, you will need to demonstrate through your receipts that your revenue dropped by at least 50% as compared to the same quarter in 2019.
Determine the amount of the employee salaries you continued to pay during any of the suspension periods stated above. You should also factor in health coverage expenses provided to all full-time workers during the relevant periods in 2020 and 2021.
Benefits of Calculating Your Employee Retention Credit
There are several benefits to calculating your ERC, including:
One of the greatest benefits of calculating your Employee Retention Credit is that you can receive a payout in the form of a check straight to your business. The funds received can be used for any business-related expenses such as:
- Giving your employees a bonus or raise
- Buying new equipment
- Extra cushion for cash flow during these uncertain times
Eligibility to Claim
You are still eligible to make a claim for the ERC in 2021, according to the Consolidated Appropriations Act (CAA), regardless of whether you have received a PPP loan in the past. Although the minimum qualifying wages to be reported are slightly different for each program, some employers can benefit from both.
Since the money from the ERC return does not come in the form of a debt in any manner, shape, or form, there is no requirement that it be repaid or forgiven.
How To Claim the Employee Retention Credit
Eligible employers must first determine their eligibility, making sure they meet the IRS’s qualifications. Otherwise, their paperwork will not be accepted. Once you are certain that you are eligible for the Employee Retention Credit, then you can move forward and actually file for the credit.
Originally, employers were able to claim the Employee Retention Credit whenever they filed quarterly taxes to the government through Form 941. However, the deadline for the Employee Retention Credit ended on September 30, 2021. Thankfully, it’s not too late for businesses to take advantage of this credit!
Employers can amend previously submitted forms by filing and submitting Form 941-x so they can retroactively claim the Employee Retention Credit. They can do so for up to three years after the original taxes were submitted. Once the credit has been filed, employers are able to track their refund.
Need Help Claiming Your Employee Retention Credit?
After learning about the Employee Retention Credit and all the benefits it offers, many small business owners may be wondering how they can go about claiming it. If you need help calculating your ERC or filing the necessary forms to claim your advance payment, we can help!