The Employee Retention Tax Credit (ERTC) is a valuable financial tool for businesses that have suffered financial hardship during the COVID-19 pandemic. It provides a refundable tax credit aimed at helping businesses retain their employees and maintain operations. In this article, we will discuss the steps to calculate the ERTC and thus maximize your potential relief.

Step 1: Determine eligibility

To be eligible for the ERTC, your business must meet one of two conditions:

1. Your operation was fully or partially suspended due to government orders related to COVID-19, or

2. You experienced a significant decline in gross receipts, which is defined as a 50% drop in Q2 2020 compared to Q2 2019 or a 20% drop in Q4 2020/Q1 2021 compared to the respective calendar quarters in 2019.

Step 2: Establish which employees qualify

Any full-time employee is eligible for the ERTC regardless of whether they were working during your qualifying period or not. Note that qualified wages, which we will discuss later, differ between businesses with more than or fewer than 100 employees.

Step 3: Determine the Creditable Wages

You’ll first need to figure out how much you’ve paid in “qualified wages” during each quarter you claim the ERTC. The definition of qualified wages varies based on number of employees:

1. If you have up to 100 full-time employees: all wages and compensation qualify.

2. If you have more than 100 full-time employees: only wages paid to employees not providing services due to COVID-19 related disruptions qualify.

Qualified wages can also include a portion of health plan expenses paid by the employer.

Step 4: Calculating the amount of credit

Now, multiply your qualified wages by the appropriate credit rate:

1. For Q2 2020 to Q3 2020: Multiply qualified wages by 50%.

2. For Q4 2020 to Q2 2021: Multiply qualified wages by 70%.

The credit amount for any given employee in a single quarter is limited to:

1. $5,000 for Q2 2020 to Q3 2020 ($10,000 of qualified wages x 50%)

2. $7,000 for Q4 2020, Q1 2021, and Q2 2021, respectively ($10,000 of qualified wages per quarter x 70%)

Step 5: Claim the credit

You can claim the ERTC on your quarterly federal tax return (Form 941). Be sure to keep detailed documentation of your calculations and the steps taken.

Conclusion

Calculating the Employee Retention Tax Credit is an essential step in ensuring your business maximizes its financial relief during these tough times. By following the steps outlined above, you can be sure that your business is taking full advantage of this program to retain its employees and maintain stability. It’s always advisable to consult with a tax professional for personalized guidance tailored to your specific situation.