The Employee Retention Credit (ERC) is a valuable tax break designed to help businesses keep their employees on payroll during the unpredictable economic conditions created by the COVID-19 pandemic. In this article, we will walk you through the steps to calculate your eligible ERC credit.

1. Determine eligibility

To be eligible for the ERC, your business must meet one of these criteria:

a. Your business was forced to partially or fully suspend operations due to government orders related to COVID-19

b. Your gross receipts for a calendar quarter in 2020 are less than 50% compared to the same quarter in 2019

c. For 2021, your gross receipts for a calendar quarter are less than 80% compared to the same quarter in 2019.

2. Identify qualifying wages

Qualified wages include those paid by an eligible employer during the period of suspended operations or reduced gross receipts. The definition of qualified wages varies depending on the size of your business:

a. If you have more than 100 employees (in 2019) – Qualified wages are those paid ONLY to employees who are not working due to COVID-19-related reasons.

b. If you have 100 or fewer employees – All employee wages qualify, whether they worked or not.
For businesses that began operation in 2020, refer to IRS guidelines to determine eligibility and qualified wages.

3. Calculate employee retention credit

Follow these steps to calculate your ERC credit:

i. Determine the applicable credit percentage (50% for the first two quarters of 2020, and 70% for each quarter in 2021).

ii. Determine which maximum wage cap applies ($10,000 in total qualified wages per employee for all quarters of 2020 and $10,000 in qualified wages per employee per quarter for Q1 and Q2 of 2021). Multiply this cap by the credit percentage.

iii. Add up the qualified wages for all eligible employees.

iv. Apply the maximum wage cap and credit percentage to each employee, and sum the amounts to calculate your total ERC.

For example:

– If you paid $8,000 in qualified wages to Employee A during Q2 of 2021, the maximum credit would be $10,000 * 70% = $7,000

– If you paid $12,000 in qualified wages to Employee B during Q2 of 2021, the maximum credit would be $10,000 * 70% = $7,000

– Your total ERC for Q2 of 2021 would be $7,000 + $7,000 = $14,000

4. Claiming your ERC credit

To claim your ERC credit, report the total credits on your quarterly employment tax return using Form 941 or a similar revised form. You can also request an advance payment of the credits using Form 7200 if your anticipated credit exceeds your federal employment tax deposits.

In conclusion, properly calculating and claiming your ERC credit can significantly reduce your business’s financial burden during these challenging times. To ensure accurate calculations and compliance with all rules and regulations regarding the ERC credit, consider consulting with a tax professional who can guide you through the process.