The Employee Retention Credit (ERC) was introduced by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020 and extended through June 30, 2021 by the Consolidated Appropriations Act, 2021. The American Rescue Plan Act of 2021 further extended the ERC to December 31, 2021. The aim of this credit is to help employers retain their employees and provide payroll tax relief during the COVID-19 pandemic. In this article, we will discuss the basic principles of calculating the employee retention credit in 2021.

Eligibility Criteria:

To qualify for ERC in 2021, your business must have experienced one of the following scenarios:

1. A complete or partial suspension in operation during any quarter due to government-imposed restrictions related to COVID-19.

2. A significant decline in gross receipts for a quarter when compared with the same quarter in 2019.

Calculating Employee Retention Credit:

For businesses eligible for ERC, follow these steps to calculate your credits for 2021:

Step 1: Determine credit rate and maximum wage amount.

– For Q1 and Q2 of 2021: The credit rate is 70%, and the maximum wage amount per employee is $10,000 per quarter.

– For Q3 and Q4 of 2021: The credit rate is still under discussion as per recent guidance from IRS.

Step 2: Identify qualified wages.

Qualified wages include wages paid to employees during periods when your business operations have been fully or partially suspended due to COVID-19-related restrictions or those paid during periods when gross receipts were significantly lower than the same period in 2019.

Step 3: Calculate your employee retention credit.

Multiply the applicable credit rate (70%) by the qualified wages up to the maximum wage amount for each employee. Then, sum up the credit amounts for all employees for each quarter. Ensure these calculations reflect any relevant changes in credit rate and maximum wage amount for the corresponding periods.

Example:

Assuming your business experienced a significant decline in gross receipts in Q1 of 2021 and had three employees:

Employee A: $8,000 in qualified wages

Employee B: $10,000 in qualified wages

Employee C: $12,000 in qualified wages (credits apply only to the first $10,000)

Calculate the credit as follows:

Employee A: 70% × $8,000 = $5,600

Employee B: 70% × $10,000 = $7,000

Employee C: 70% × $10,000 (not 12,000) = $7,000

Total ERC for Q1 2021: $5,600 + $7,000 + $7,000 = $19,600

Conclusion:

Understanding how to calculate your ERC can be beneficial to help maintain cash flows and retain your employees during these uncertain times. Note that businesses that have received a Payroll Protection Program (PPP) loan may still be eligible for this credit as long as there is no double-dipping; that is using the same wages to qualify for both PPP loan forgiveness and ERC. To ensure correct claim filings and avoid any pitfalls or penalties with the IRS, it is always advised to consult with a tax professional who is familiar with these credits.