How to Calculate ERC: The 6-Step Guide to Employee Retention Credit Calculation

The past couple of years have presented numerous challenges for businesses, particularly smaller establishments. The COVID-19 pandemic, in conjunction with government restrictions, has had a significant impact on companies and their employees. One relief measure offered by the US government is the Employee Retention Credit (ERC). If applying for ERC, it’s best to work with an experienced consultant or lawyer who knows the in’s and out’s of ERC, including its calculation, eligibility requirements, and application process. We will also address frequently asked questions pertaining to this tax credit.

If you need help with the application process or just want to ensure you (1) fill out the application correctly; and (2) you get the max amount you are eligible for schedule a live call with us here or call us now at 239-376-3428 . We at Biz Head Law have helped 7,500+ clients with the entire process.

Quick Overview of Employee Retention Credit (ERC)

The Employee Retention Credit (ERC) is a tax credit introduced by the US government to support businesses affected by the COVID-19 pandemic. Its primary objective is to assist employers in retaining their workforce and sustaining payroll operations during this crisis. The ERC is available to eligible employers, regardless of their size, business segment, or annual revenue.

Initially enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the ERC allowed eligible employers to claim up to 50% of qualified employee wages for the period between March 12, 2020, and January 1, 2021. The maximum credit per employee was set at $10,000 per quarter.

Calculating ERC: Understanding the Basics

Calculating the Employee Retention Credit can be both simple and complex. To calculate the ERC for your business accurately, it is essential to understand the specific rules and requirements for each year. The credit percentage, maximum credit, and eligibility criteria differ between 2020 and 2021.

For the year 2020, the ERC percentage stood at 50% of qualified wages paid to employees after March 12, 2020, and before January 1, 2021. The maximum credit was capped at $10,000 per employee per year

In contrast, for 2021, the ERC percentage was increased to 70% of qualified wages paid to employees from January 1 to December 31, 2021. The maximum credit per employee for the year was capped at $28,000.

Do not wait to apply. You can still get your credit in 2023, but time is running out. If you need assistance schedule a live call with one of our lawyers at Biz Head Law here or call us now at 239-376-3428 .

Eligibility Criteria and Rules for ERC

To qualify for the Employee Retention Credit, a business must meet specific eligibility criteria. While the criteria are similar for 2020 and 2021, there are slight variations.

ERC Eligibility for 2020:

For the year 2020, employers are eligible for the ERC if they experienced a significant decline in gross receipts or faced a partial or full suspension of operations due to government restrictions related to COVID-19. A significant decline in gross receipts refers to a decrease of at least 50% in a quarter compared to the corresponding quarter in 2019. Employers remain eligible for the ERC for each quarter in 2020 until their gross receipts exceed 80% of the same quarter in 2019.

ERC Eligibility for 2021:

The eligibility criteria for 2021 mirror those of 2020. Businesses that experienced economic hardship due to the COVID-19 pandemic or faced government restrictions on economic activities during one or more quarters of 2021 are eligible for the ERC. Additionally, businesses with gross receipts less than 80% of the gross receipts in the corresponding quarter of 2019 can also claim the credit.

Claiming ERC: The Application Process

To claim the Employee Retention Credit, business owners must follow specific steps and procedures. Employers have the option to claim the credit for past periods or request advance payments.

1. Gather Required Documentation

   Before applying for the ERC, ensure that you have all the necessary documents, including payroll records, evidence of revenue loss, and information about any Paycheck Protection Program (PPP) loans you may have received.

2. Determine Eligibility

   Review the eligibility criteria for the ERC to ascertain if your business meets the requirements. If you qualify, proceed with the application process.

3. Calculate ERC

   Utilize the appropriate calculation method for each year (2020 or 2021) to determine the amount of ERC your business is eligible to claim.

4. File IRS Form 941-X

   To claim the ERC, employers must file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, with the Internal Revenue Service (IRS). This form enables employers to report their ERC and request a refund or credit for the eligible amount.

How to Calculate ERC: A 6 Part Step-by-Step Guide

To calculate the Employee Retention Credit for your business, follow these steps:

1. Step 1: Determine the Number of Full-Time Equivalent (FTE) Employees

   The ERC calculation relies on the number of full-time equivalent (FTE) employees your business employed during the relevant period. In 2020, the threshold was 100 FTEs, while in 2021, it increased to 500 FTEs.

2. Step 2: Identify Qualified Wages

   Qualified wages encompass the compensation and benefits paid to eligible employees, including the employer’s share of health plan costs. The definition of qualified wages varies based on the number of FTEs during the applicable period.

3. Step 3: Calculate the ERC Percentage

   Note – For 2020, the ERC percentage amounts to 50% of qualified wages. In 2021, the percentage increased to 70% of qualified wages.

4. Step 4: Calculate the Maximum Credit Amount

   Note – For 2020, the maximum credit amount per employee per quarter is $10,000.

5. Step 5: Apply the ERC Percentage and Maximum Credit Amount

   Multiply the qualified wages by the ERC percentage and apply the maximum credit amount to calculate the ERC for each employee.

6. Step 6: Calculate the Total ERC for Your Business

   Add up the ERC amounts for all eligible employees to determine the total ERC for your business.

The Role of IRS Form 941-X in ERC Calculation

IRS Form 941-X serves to make adjustments to previously filed Forms 941, Employer’s Quarterly Federal Tax Return, and to claim the ERC. Employers must file Form 941-X for each quarter in which they are claiming the credit.

When completing Form 941-X, ensure that you provide accurate and comprehensive information, including your Employer Identification Number (EIN), the applicable calendar quarter, and the correct dollar amounts. Incomplete or inaccurate information may result in delays or rejection of your claim.

Impact of ERC on Other Credits and Relief Provisions

Claiming the Employee Retention Credit can impact other tax credits and relief provisions available to your business. For instance, an employer cannot claim both the ERC and a PPP loan. Additionally, if an employee is eligible for a Work Opportunity Tax Credit or a credit for paid family and medical leave, their wages cannot be included in the ERC calculation.

Frequently Asked Questions (FAQs) about Employee Retention Credit

• How long does it take to receive the ERC refund?

  The processing time for ERC refunds varies depending on the complexity of your application and the backlog of applications at the IRS. It can take anywhere from a few weeks to several months to receive your refund.

• Can a business claim both a PPP loan and an ERC?

  No, a business cannot claim both a PPP loan and an ERC. If a business has already applied for a PPP loan, they may not be eligible for the ERC.

• Are ERC refunds taxable?

  Yes, ERC refunds are taxable. Employers must report the ERC as taxable income and reduce their deductions for wages and health plan expenses by the amount of the credit.

• Can a business apply for ERC if they have low payroll taxes?

  Yes, a business with low payroll taxes can still apply for the ERC. The ERC is a refundable credit, which means that if the credit exceeds the employer’s payroll tax liability, the excess amount will be refunded to the employer.

• How can a business expedite the ERC application process?

  To expedite the ERC application process, ensure that your application is complete and accurate, stay up-to-date on program policies and guidelines, and consider working with a lawyer at Biz Head Law experienced in the ERC program.

Where do you apply for ERC in 2023?

Calculating and claiming the Employee Retention Credit can be a complex process, but it is a crucial relief measure for businesses affected by the COVID-19 pandemic. By understanding the eligibility criteria, accurately calculating the credit, and following the application process, your business can receive the necessary financial support to retain employees and maintain payroll during these challenging times.

Additional Resources for Employee Retention Credit

• IRS Employee Retention Credit Information
• SBA Paycheck Protection Program Information
• FFCRA Paid Leave Tax Credit Information

If you need help with the application process or just want to ensure you (1) fill out the application correctly; and (2) you get the max amount you are eligible for schedule a live call with us here or call us now at 239-376-3428 . We at Biz Head Law have helped 7,500+ clients with the entire process.