The Employee Retention Credit (ERC) was introduced in the United States as part of the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) in March 2020 and was later extended and amended by the Consolidated Appropriations Act 2021 and the American Rescue Plan Act 2021. Its purpose is to support businesses affected by COVID-19 to keep their employees on payroll. This article outlines steps for employers to calculate the employee retention credit.

Step 1: Determine Eligibility

To be eligible for the ERC, an employer needs to fulfill one of these two conditions:

1. The employer’s business experienced a full or partial suspension of operations because of government orders limiting commerce, travel, or group meetings.

2. The employer experienced a significant decline in gross receipts during a calendar quarter.

For 2020, a significant decline is defined as at least a 50% decrease in gross receipts compared to the same quarter in 2019. For 2021, this threshold has been lowered to at least a 20% decrease.

Step 2: Identify Qualified Wages

Qualified wages include:

– For employers with 100 or fewer full-time employees in 2019 (500 or fewer for January-June 2021): All wages paid to employees during eligible quarters.

– For larger employers: Wages paid for hours not worked during eligible periods.

Qualified wages also include certain health plan expenses paid by the employer.

Step 3: Calculate the Employee Retention Credit

The credit rate depends on the period:

– For wages paid between March 13, 2020, and December 31, 2020: 50% of qualified wages. The maximum credit for this period is $5,000 per employee ($10,000 of qualified wages x 50%).

– For wages paid between January 1, 2021, and June 30, 2021: 70% of qualified wages. The maximum credit for this period is $7,000 per employee per quarter ($10,000 of qualified wages x 70%).

– For wages paid between July 1, 2021, and December 31, 2021: 70% of qualified wages. The maximum credit for this period is $7,000 per employee per quarter ($10,000 of qualified wages x 70%).

Step 4: Claim the Credit

Employers can claim the ERC by reducing their employment tax deposits or requesting an advance payment from the IRS if their expected credit exceeds their employment tax liabilities.

Conclusion

Calculating and claiming the Employee Retention Credit can be complex due to the changing parameters across different periods. Employers are advised to consult with professional tax advisors or CPA firms to ensure compliance and accurate calculations. By understanding the eligibility criteria and calculations involved in ERC, businesses can take advantage of this relief measure to better navigate pandemic-related challenges.