The global COVID-19 pandemic unleashed unprecedented challenges across various economic sectors, with small businesses taking a particularly harsh hit. Government-mandated shutdowns, reduced working hours, and layoffs left many small companies struggling to stay afloat. In response, the government introduced the Employee Retention Credit (ERC) to support businesses that chose to retain their workforce during these trying times. This article dives into the intricacies of calculating the Employee Retention Credit and explores the benefits it offers to help small businesses recover from the economic turmoil.
Understanding the Employee Retention Credit (ERC)
The Employee Retention Credit is a vital tax credit established to aid businesses grappling with the economic fallout of the COVID-19 pandemic. Qualified employers can receive a portion of the qualified wages paid to their employees, providing crucial financial relief. In 2020, the credit amounted to 50 percent of eligible wages, and in 2021, it increased to 70 percent, making it an indispensable tool for businesses navigating economic uncertainty.
Qualifying for the Employee Retention Credit
Before delving into the calculations, it’s essential to ascertain who qualifies for this valuable credit. To be eligible for the ERC, a business must meet at least one of the following criteria:
- Operations were fully or partially suspended in 2020 or 2021 due to governmental directives restricting business, travel, or meetings related to the pandemic.
- The business experienced a significant decline in gross receipts.
Understanding Qualified Wages
Qualified wages are paid to employees between March 12, 2020, and January 1, 2021, for the tax year 2020 and every quarter for 2021. The credit is calculated as 50 percent of qualified wages, capped at $10,000 per year for 2020 and per quarter for 2021.
The definition of qualified wages for 2020 varies based on the number of employees a business had in 2019:
- For businesses with over 100 full-time employees in 2019, qualified wages are those paid to employees during periods of non-service due to a significant decline in gross receipts or government-mandated shutdowns.
- For businesses with fewer than 100 full-time employees, qualified wages include those paid to all employees under the same circumstances.
It’s crucial to note that wages used to obtain Paycheck Protection Program (PPP) loan forgiveness cannot be used as qualified wages for the Employee Retention Credit, ensuring fairness and preventing double-dipping.
Calculating the Employee Retention Credit
While calculating the Employee Retention Credit might seem complex, particularly for those unfamiliar with tax calculations, it’s valuable. Here’s a step-by-step guide to help you navigate the process effectively:
1. Determine Gross Receipts
To qualify based on a decline in gross receipts, compare your gross receipts for a specific quarter in 2020 or 2021 to the same quarter in 2019. You could be eligible for the ERC if your gross receipts were below 50 percent for any calendar quarter in 2020 or below 80 percent in 2021 compared to the same quarter in 2019.
2. Know Your Business Operations
Determine whether your business was subject to partial or complete suspension due to governmental orders in 2020 or 2021.
3. Review Gross Receipts and Payroll Tax Deposits
Carefully evaluate your quarterly payroll tax deposits and receipts to assess eligibility. Consider seeking assistance from a tax specialist to ensure accuracy.
4. Determine Qualified Employees
Calculate the average number of full-time employees working for your company each month in 2019, 2020, and 2021. For ERC purposes, a full-time employee works 30 or more per week or 130 hours monthly.
5. Do the Math
To qualify for the credit based on revenue loss, demonstrate that your revenue dropped by at least 50 percent compared to the same quarter in 2019. Additionally, factor in the employee salaries paid during suspension periods and health coverage expenses for full-time employees during 2020 and 2021.
Benefits of Calculating Your Employee Retention Credit
Increased Funds. Calculating your Employee Retention Credit can provide a financial boost. You receive a payout directly to your business, which can be used for various purposes, such as employee bonuses, equipment purchases, or as a cushion for cash flow during uncertain times.
Eligibility to Claim. The Consolidated Appropriations Act (CAA) allows businesses to claim the ERC in 2021, even if they previously received a PPP loan. Some employers can benefit from both programs, maximizing their financial support.
Non-Refundable Aid. The ERC funds are not a debt and do not require repayment or forgiveness, providing businesses with much-needed financial relief without added financial burdens.
How to Claim the Employee Retention Credit
Eligible employers must determine their eligibility based on IRS qualifications before filing for the ERC. Although the original deadline for claiming the credit through Form 941 passed on September 30, 2021, businesses can still take advantage of this opportunity. Here’s how:
1. Determine Eligibility
Ensure that your business meets the IRS qualifications for the Employee Retention Credit.
2. File Form 941-X
If eligible, amend previously submitted forms by filing Form 941-X to claim the ERC retroactively. Businesses have up to three years after the original tax submission to do this.
3. Track Your Refund
Once the credit has been filed, employers can track their refund, providing a clear picture of the benefits gained.
Need To Learn More?
Understanding the calculations and benefits of the ERC is crucial for small businesses seeking financial support and recovery. By leveraging this valuable tax credit, businesses can bolster their finances, retain employees, and secure a more resilient future in the face of uncertainty. If you require assistance with calculating your ERC or filing for the credit, don’t hesitate to seek professional guidance to maximize your financial benefits and ensure compliance with IRS regulations.
Solutions by Mike Miller, CPA 