How to Calculate Employee Retention Tax Credit

The Employee Retention Tax Credit (ERTC) is a crucial financial support mechanism aimed at helping businesses affected by the COVID-19 pandemic keep their workforce. The ERTC is a refundable tax credit that businesses can claim against employment taxes. To maximize the financial benefits available through the ERTC, it is essential to understand the eligibility criteria and calculation process. This article will guide you through the steps to calculate the ERTC accurately.

Eligibility Criteria for ERTC

Before diving into the ERTC calculation, it is necessary to determine whether your business is eligible for the credit. The eligibility criteria for the ERTC have evolved over time as new legislation has been introduced. Here are the main factors to consider for eligibility:

Government-Mandated Shutdowns or Reductions in Business Operations

Your business may be eligible for the ERTC if it experienced a full or partial suspension of operations due to a government order related to COVID-19 during any quarter.

Significant Decline in Gross Receipts

A significant decline in gross receipts is another determining factor for ERTC eligibility. For 2020, a business would be eligible if its gross receipts for any quarter were less than 50% compared to the same quarter in 2019. For 2021, eligibility is determined if gross receipts for any quarter were less than 80% compared to the same quarter in 2019.

ERTC Calculation: Step-by-Step Guide

Once you have confirmed your business's eligibility for the ERTC, follow these steps to calculate the credit accurately:

Step 1: Determine the Applicable Time Period

Identify the quarters during which your business was impacted by government-mandated shutdowns, reductions in business operations, or significant declines in gross receipts. The ERTC calculation varies depending on the year and quarter in which these events occurred. Ensure you are using the correct parameters for the corresponding time period.

Step 2: Calculate Qualified Wages

The next step is to calculate the qualified wages for each eligible employee. Qualified wages include salaries, hourly pay, and certain health care expenses paid by the employer. The definition of qualified wages varies depending on the number of full-time employees your business had in 2019:

Step 3: Determine the Applicable Percentage for the Credit

The percentage of qualified wages eligible for the credit varies depending on the year:

Step 4: Calculate the ERTC

Multiply the qualified wages by the applicable percentage to calculate the ERTC for each eligible employee. Ensure you adhere to the maximum credit limits for the corresponding time period.

Step 5: Apply Any Relevant Special Rules

Certain special rules may apply to specific business situations:

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