As a response to the financial impact of the COVID-19 pandemic on businesses, the U.S. Government introduced the Employee Retention Credit (ERC). This refundable tax credit incentivizes businesses to keep employees on their payroll during these challenging times.
Although the concept is straightforward, the calculation of the ERC can be complex. But don’t worry – an ERC calculator can significantly simplify this process. Let’s delve into how you can calculate your ERC.
Understand the Eligibility Criteria
Before you dive into calculating the ERC, first verify your eligibility. You qualify if your business operations were either fully or partially suspended due to a COVID-19-related shutdown order or if your gross receipts for a quarter in 2021 were less than 50% of the same quarter in 2019. For businesses that started after 2019, there are alternate measures to ascertain eligibility.
Determine Qualified Wages
Qualified wages serve as the foundation for your ERC calculation. Wages, tips, and other compensation paid to an employee during an eligible quarter are all included. If you own a small business with fewer than 100 employees, all wages paid qualify for the credit, whether your business is open or closed. Only wages paid to employees for the time they are not providing services qualify for larger businesses.
Calculate the Credit
The ERC is a percentage of an employee’s qualified wages paid during the eligible period. This rate is expected to be 70% in 2021. Keep in mind there’s a cap: the maximum wage that can be considered for each employee in each quarter is $10,000. This means the maximum credit for each employee per quarter is $7,000 (70% of $10,000).
Factor in Health Care Costs
One important but often overlooked aspect of calculating the ERC is that the employer’s cost of providing health care benefits can be included as part of the qualified wages. These costs can be substantial, especially for larger businesses, and can significantly increase the amount of ERC that a business is eligible to receive.
Account for Other Relief Programs
One caveat to be aware of when calculating your ERC is that any wages used to calculate other tax credits or relief programs, such as the Paycheck Protection Program loans or the Family and Medical Leave Credit, cannot be used to calculate your ERC. This “double dipping” prevention means careful accounting is needed to ensure you calculate your ERC correctly.
File with the IRS
After you’ve calculated your ERC, you’ll need to report it on your quarterly federal tax return, usually Form 941. If your ERC is larger than the employer portion of the social security tax owed, the difference is fully refundable.
Calculating the ERC may seem a daunting task, given the intricacies involved. An ERC calculator can serve as an indispensable tool, simplifying the process and helping you accurately estimate your credit. Amid these challenging times, the ERC can provide much-needed financial relief, helping to keep your business operational and your employees on the payroll.