Calculating the Employee Retention Credit: A Guide for Businesses

The Employee Retention Credit (ERC) is a valuable tax credit designed to help businesses retain employees during challenging times. If you’re wondering how to calculate this credit, particularly concerning gross receipts, this guide will provide you with the information you need for 2020 and 2021.

How to Calculate the Employee Retention Credit

The calculation of the ERC involves several factors, but the main components include qualified wages and the applicable credit rate. To calculate the credit, follow these steps:

Determine the qualified wages

Identify the wages paid to eligible employees during the designated periods. For 2020, qualified wages include those paid between March 13 and December 31. For 2021, the period extends from January 1 to December 31. Remember, there are specific criteria for eligible employees, such as full or partial suspension of business operations or a significant decline in gross receipts.

Apply the applicable credit rate

The credit rate for 2020 is 50% of qualified wages, up to a maximum of $10,000 per employee for the year. In 2021, the credit rate increased to 70% of qualified wages, also capped at $10,000 per employee per quarter.

Calculate the credit

Multiply the qualified wages by the applicable credit rate to obtain the employee retention credit amount for each eligible employee.

Claim the credit

When filing your employment tax returns (Form 941 for quarterly filers or Form 944 for annual filers), report the credit on the designated line and reduce your employment tax liability accordingly.

Calculating Gross Receipts for the Employee Retention Credit

Gross receipts play a crucial role in determining eligibility for the ERC. To calculate gross receipts:

Determine the period

For 2020, compare gross receipts from the same calendar quarter in 2019. If the business did not exist in 2019, use the corresponding quarter in 2020. For 2021, the comparison remains the same, but there’s also an option to use the immediately preceding quarter if there’s a significant decline in gross receipts.

Calculate gross receipts

Add up all the revenue from sales of goods, services, or other sources of income before deducting any expenses or returns.

Compare to the threshold

If there’s a significant decline in gross receipts, defined as 50% or more compared to the same quarter in the prior year, you may qualify for the ERC.

Conclusion

Remember, these calculations can be complex, and it’s essential to consult with a tax professional or use reliable tax software to ensure accuracy and compliance with IRS guidelines. Stay updated on the latest guidance and changes from the IRS as the regulations may evolve. The ERC or ERTC provides a valuable opportunity for businesses to retain employees, so understanding the calculation process is crucial to maximize its benefits.

As with any tax-related matter, it is crucial to seek professional advice. If you’re looking for help filing the ERC, click here for assistance from a friendly ERC Specialist.

Don’t forget to contact Team Advantage Insurance Solutions if you have any queries!