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.

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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:

• For businesses with 100 or fewer full-time employees in 2019, all wages paid to employees during the eligible period qualify.
• For businesses with more than 100 full-time employees in 2019, only wages paid to employees not providing services during the eligible period qualify.

Step 3: Determine the Applicable Percentage for the Credit

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

• For 2020, the credit is equal to 50% of qualified wages (up to a maximum of $10,000 per employee for the year, including certain health care expenses).
• For 2021, the credit is equal to 70% of qualified wages (up to a maximum of $10,000 per employee per quarter, including certain health care expenses).

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:

• For "recovery startup businesses" (businesses that began operations after February 15, 2020, and have average annual gross receipts under $1,000,000), the credit is limited to $50,000 per calendar quarter.
• For "severely financially distressed employers" (businesses that experienced a decline in gross receipts of 90% or more compared to the same quarter in 2019), all wages paid to employees, regardless of the number of full-time employees, qualify as qualified wages.

Ensure you apply these special rules, if applicable, to your ERTC calculation.

Claiming the ERTC

Once you have calculated the ERTC for your business, you can claim it by reducing your employment tax deposits during the eligible quarter or by filing Form 7200 to request an advance payment of the credit. Additionally, the ERTC can be claimed on your quarterly employment tax return (Form 941) by reporting the total qualified wages and the corresponding ERTC.

Conclusion

Calculating the Employee Retention Tax Credit accurately is essential for businesses to maximize the financial benefits available through this program. By understanding the eligibility criteria and following the step-by-step guide provided in this article, businesses can navigate the ERTC calculation process with ease. Always stay up-to-date with the latest changes in legislation and consult with a tax professional or accountant to ensure that your business claims the ERTC correctly.

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