Calculating The Employee Retention Tax Credit

At KPN, we’re all about helping you grow your business and save as much money on taxes as possible. A huge opportunity for business owners to get access to cash now is the employee retention tax credit (ERC). 

But how exactly can you calculate how much you’ll receive? Well, there are multiple factors that will go into your calculation, so it’s often best to work with a professional for an accurate estimate.

However, the guide below will assist you in calculating ERC.

Note: We’re going to assume that you already know that your business is eligible for the ERC and want to calculate the ERC accordingly.

Calculating the Employee Retention Tax Credit

Before we can go into the calculations, there is a lot of information that you must know to calculate the credit properly:

Qualified Wages 

Since the ERC is tied to an employee’s wages, it’s crucial to know which wages are considered “qualified.” In general, the following will be considered qualified wages if paid by a business:

  • Compensation
  • Health plan expenses

If your business continued to pay for health care benefits for employees who didn’t work, they may also count as qualified wages. Working with an advisor is key if you paid for health benefits for employees who didn’t work because the credit changes based on whether you are:

  • Fully insured
  • Self-insured
  • Combination of both 

Further, if your business has a significant decline of 90% or more in 2019 due to the pandemic, you’re considered a severely financially distressed employee. In this case, all wages in Q3 2021 are considered qualified wages.

2020 ERC Requirements

If you still paid employees from March 12 – December 31, 2020, 50% of wages, up to $5,000 an employee, may be claimed for all quarters combined. The 2020 ERC does have a lot of requirements that must be met to qualify:

  • 100+ average full-time equivalent employees: Qualified wages only count for employees that weren’t providing services due to:
    • Significant decline in gross receipts
    • Partial or full operation suspension
  • 100 or fewer average full-time equivalent employees: Qualified wages include any compensation paid to employees due to:
    • Significant decline in gross receipts
    • Partial or full operation suspension

If you had more than 100 average full-time equivalent employees and met the criteria above, qualified wages cannot exceed what the employee received for the 30 days before the hardship. Additionally, if you meet the requirements for 100 or fewer employees, any wages you pay to working or non-working employees are considered qualified.

2021 ERC Requirements

Significant changes to ERC in 2021 allow for 70% of all wages on up to $10,000 for each employee during each quarter for the first three quarters. So, you can:

  • Claim a credit of up to $7,000 per employee, per quarter
  • Maximum credit per employee of $21,000

However, the requirements differ from 2020:

  • 500+ average full-time equivalent employees: Qualified wages only count for employees that weren’t providing services due to:
    • Significant decline in gross receipts
    • Partial or full operation suspension
  • 500 or fewer average full-time equivalent employees: Qualified wages include any compensation paid to employees due to:
    • Significant decline in gross receipts
    • Partial or full operation suspension

Understanding these requirements is important because larger businesses during these periods could not claim qualified wages for paying employees that were working.

Full-time Employee Classification

Full-time is defined, in the case of claiming your ERC, as an individual who works:

  • 30 hours per week or more, or
  • 130 hours per month

All full-time statuses are in respect to the hours worked in 2019. If your business started in 2020, you’d need to use the average full-time requirement from 2020.

Is This Available For A New 2021 Business? Yes!

Your business is considered a “recovery startup business,” and you can claim a credit up to $50,000 each quarter for wages paid through December 31, 2021. However, annual gross receipts must remain under $1 million to qualify for the ERC in this case.

What’s a Significant Decline In Gross Receipts?

A significant decline is a decline of 50% of gross receipts compared to the same quarter a year prior. In 2021, a significant decline was a 20% decrease in receipts compared to the same quarter in 2019. 

It’s important to note that there is a safe harbor available for Q1 2021, which allows one to use the previous quarter’s gross receipts compared to the same quarter in 2019. To provide an example of this, in Q1 2021, you can compare gross receipts for:

  • Q1 2021 to Q1 2019, or 
  • Q4 2020 to Q4 2019

What if I Didn’t Have a Decline in Gross Receipts but Had a Capacity Limitation? 

If a business had capacity limitations during this time, it could still qualify for the credit even without a significant decline in gross receipts even. Due to capacity limitations, it is assumed that hardship caused earning impairment.

Calculating Your Credit per Employee

With all of this information in mind, it’s now possible to calculate your ERC per employee based on the requirements of each year and how they impact your credit. The credit is based on each quarter that you pay an employee.

Let’s look at a few examples:

  • In 2020, you paid Jeff $10,000 in Q3 and $8,000 in Q4. The maximum credit you can claim for Jeff is $5,000 (50% of $10,000). Jeff’s wages exceed $10,000 in Q4, so the credit is capped. 
  • In 2021, you paid Jeff $10,000 in Q1 and $10,000 in Q2. You can claim a credit of $7,000 (70% x $10,000) in both Q1 and Q2 for a total of $14,000. The maximum credit allowed for each employee is capped at $21,000 per employee. 

You would need to calculate these credits for each full-time employee you had during 2020 and/or 2021 or for employees paid even when not providing services during either of these years.

It’s important to accurately make these calculations because you’re losing out on money if you make a mistake during the calculation. Given the complexity of the credit, we recommend you work with a professional to determine the exact amount you may qualify for.

If you’re reading this and wondering if you qualify for the ERC because your company suffered economic despair during the pandemic, the answer is probably yes! Let’s find out and get you access to the credits you deserve. Our consulting company can help you through the entire process. To get started today, email Keith Hanson: keith.hanson@blwinvestments.com.