Two Ways How to Calculate Employee Retention Credit

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how to calculate employee retention credit

In the heat of COVID-19, every economic sector globally suffered a humungous decline. Business owners had to encounter the challenge to surface and survive through times of closure. As a part of helping small and mid-sized enterprises to withstand the weight of financial losses, Employee Retention Credit (ERC) was enacted under the COVID-19 Aid, Relief, and Economic Security Act (CARES Act) by the federal government.

Being of great value to business owners, it is essential to know how to calculate employee retention credit as it was mainly a step taken by the federal government to assist employees in making ends meet.

The Employee Retention Credit (ERC) is one of the most successful and easily accessible refundable credits for small and medium-sized enterprises rather than other relief options. It would not be a loan but rather a way of rewarding employers by the government if they kept operating and paying qualified wages to their employees, despite a decline.

ERC is also available for tax-exempt organizations to evade the nerve-wracking economic effects of the pandemic. If you’re unsure if you fall in the eligibility criteria and how to calculate employee retention credit, read on to learn about this excellent refund opportunity.

What is Employee Retention Credit?

The federal government created a refundable tax credit known as the Employee Retention Tax Credit (ERC) to encourage business owners to retain their staff throughout the COVID-19 pandemic. Both small and mid-sized firms are eligible for the Employee Retention Credit.

In line with the CARES Act, it was approved on March 27, 2020. In 2021, the bill underwent a considerable expansion.

It is designed by the federal government to endow benefits to employers and employees instead of tax collection from businesses in the wake of the pandemic. To make procedures easy to comprehend on how to calculate employee retention credit, the CARES Act stated percentages of qualified salaries paid during specific periods. The total ERC of an employer is unrestricted.

Eligibility criteria for Employee Retention Credit

To help with the expense of keeping employees on the payroll, employers may be eligible for the refundable tax credit under Employee Retention Credit (ERC). A company must be an “eligible employer” to be eligible for ERC credit.

If your business suffered a considerable decline after March 2020 compared to 2019, you stand a chance to claim ERC.

While you are working out how to calculate employee retention credit, “considerable decline” means that your gross receipts in 2020 or 2021 must be 20% less than during the same quarter in 2019. You might be eligible if you had 500 or fewer employees that year.

If you had 100 or fewer employees in 2019, you might qualify for a 100% employee wage credit, regardless of your current business status.

If you had more than 100 employees, COVID-19 forced your business to a closure or a more than 20% decline in your business operations, and yet you dispatched employee wages, you stand a bright chance to qualify.

Startup businesses that were launched after February 15, 2020, can qualify. Additionally, their yearly gross receipts must be $1 million or less. For certain firms, the ERTC will be capped at $50,000.

What are qualified salaries?

“Qualified earnings” refers to full-time workers’ benefits and remuneration. These wages are adjusted to reflect the costs of the employer’s health plan. Any company that made that payment while experiencing a challenging operation period qualifies for the ERC credit.

How to calculate employee retention credit?

It is straightforward but challenging. You only need to comprehend its computation methods thoroughly.

Businesses are eligible to claim credit for both the years 2020 and 2021. From March 13, 2020, to January 01, 2021, the refund claim percentage was set to 50% of the reasonable salary. Any employer offering a maximum of $10,000 in wages was eligible.

Hence, the wages claim calculation will be (considering maximum salary) 50% x 10,000 =$5000 per employee per quarter. The business can claim up to $15000 per employee for 2020.

Similarly, for 2021, the retention credit cap was increased to 70 % of qualified employers’ wages from January 1, 2021, to December 31, 2021. So an employer can claim a total maximum credit of $28,000 (70% x $10000 = $7000 per quarter, $7000 x 4 = $28000) for the year 2021 per employee. The maximum credit is allowed up to $10,000 per employee.  

How to calculate ERC

As per the ERC under Section 3134 of the Code on how to calculate employee retention credit, businesses can claim the credit for the past period or file for advance payments.

To start the ERC claim for the past period, employers must file Form 941, Employer’s Quarterly Federal Tax Return.

Try filling out form 7200, where employers with more than 500 employees are not eligible for the advance payment. Form 7200 is a must for getting advance credit, which is why a missing or inaccurate Employer Identification Number (EIN) may lead to rejection.

What is the deadline to claim ERC?

While getting a grip on how to calculate employee retention credit, it is pertinent to know that ERC is available for wages paid until December 31, 2021. Since its original mention in the aftermath of the pandemic, the ERTC (Employee Retention Tax Credit) has been extended as part of the Consolidated Appropriations Act of 2021.

While wages paid in 2022 by eligible employers aren’t protected anymore, they can file claims for the active periods that fall under the criteria of this act.

The challenges

To fully understand how to calculate employee retention credit, some challenges hindering the smooth processing of ERC are:

There is limited guidance from the IRS regarding partial business closure. It takes 9 – 12 months or longer to process and issue refunds.

The IRS will audit your refund — and if you’re ineligible, you’ll have to repay it with interest and penalty.

Final thoughts

Still, confused about how to calculate employee retention credit? To receive credit, preserve a copy of your tax, payroll, and other papers for the past five years. You can use ERC to keep your business on track after COVID-19 hit the world hard. Beyond that, it appears to be a sound option rather than opting for loans since it does not require any repayment. In this uncertain environment, every penny counts, so increase your federal return to increase the amount of money you can keep.

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