The Employee Retention Credit (ERC) has been a saving grace for businesses struggling to keep their employees on the payroll during tough times. With the credit available for both 2020 and 2021, it’s crucial for business owners to understand how to calculate their eligibility and claim the credit they are entitled to.
This article provides a technical yet engaging guide on how to calculate the Employee Retention Credit, including an overview of its eligibility requirements, maximum credit amounts, and Grass Receipts Test.
For many businesses that have been hit hard by the pandemic, claiming the ERC is essential for survival. However, navigating through its complex rules and regulations can be daunting. This is where this article comes in – it offers a step-by-step breakdown of the ERC calculation process, from identifying qualifying wages and health expenses to understanding the Grass Receipts Test.
Whether you’re a small business owner or a tax professional looking to help your clients claim what they deserve, this article will equip you with all necessary information needed to calculate the ERC accurately.
So let’s dive in and liberate your business from financial uncertainty!
ERC Eligibility Criteria
You’ll be happy to know that to determine if you’re eligible for the Employee Retention Credit (ERC), you need to pass the Gross Receipts Test. This test requires your gross receipts for each quarter in 2021 to be less than 80% of what they were in 2019.
If your business was not operational during all of 2019, then it must compare its gross receipts from the first quarter of 2021 with those from January through March 2020.
Moreover, businesses can also qualify for ERC by meeting certain criteria related to government orders or restrictions. For instance, a company may qualify if it had operations fully or partially suspended due to governmental orders limiting commerce, travel, or group meetings. Similarly, a business may also qualify if it experienced a significant decline in gross receipts during any calendar quarter compared to the same period in 2019.
It’s important to note that employers who received a Paycheck Protection Program (PPP) loan are ineligible for ERC on wages paid using PPP funds. However, they can still claim ERC on wages that exceed PPP loan forgiveness amounts or use other funds not associated with PPP loans.
Maximum Credit Amounts
The maximum amount that can be claimed for eligible wages paid to any employee during 2021 is $28,000 under the Employee Retention Credit. However, this credit is subject to a cap of 70%, which means that only 70% of the eligible wages can be claimed.
To qualify for this credit in 2021, businesses must also meet certain requirements such as showing gross receipts for each quarter in 2021 are less than 80% of what they were in 2019.
It’s important to note that the $28,000 maximum credit amount applies to each employee separately. This means that if an employer has multiple employees who meet the eligibility criteria, they may claim up to $28,000 in credits for each employee.
However, it’s worth noting that not all wages are eligible for this credit and certain conditions must be met before claiming it.
Calculating the maximum amount you may claim under the ERC can be complex and requires meticulous attention to detail. As such, consulting with a professional ERC/ERTC Tax Expert or accountant is advisable before filing an IRS claim.
Gross Receipts Test
Don’t miss out on the potential benefits of the Gross Receipts Test when determining your eligibility for the Employee Retention Credit.
This test is used to determine whether a business has experienced a significant decline in gross receipts, making it eligible for ERC. The test requires businesses to compare their quarterly gross receipts from 2021 with those from 2019. If the business’s gross receipts are less than 80% of what they were in 2019 for any quarter, it may be eligible for ERC.
To calculate its eligibility under the Gross Receipts Test, a business needs to consider all its revenue streams during that quarter. Gross receipts include sales, services rendered, interest income, and other sources of revenue.
It’s important to note that even if a business didn’t operate in 2019 but began operating in 2020 or later, it can still qualify for ERC by comparing its quarterly gross receipts with an average of Q1 and Q2 of 2021.
If your business meets the requirements under the Gross Receipts Test, you’re one step closer to receiving Employee Retention Credit. However, calculating your eligibility can be complicated and time-consuming. That’s why consulting with an ERC/ERTC Tax Expert is recommended before filing an IRS claim.
Qualified Wages
If you’re wondering which wages qualify for the ERC, it’s important to note that not all types of compensation are eligible. To be considered qualified wages, the payments must have been made to an eligible employee during a designated quarter in 2020 or 2021. These quarters include those in which your business experienced a full or partial suspension due to government orders related to COVID-19 or had a significant decline in gross receipts.
Qualified wages include salaries, commissions, tips, and other forms of compensation paid to employees. However, certain benefits such as group health plan coverage and retirement contributions are excluded from the calculation of qualified wages. Additionally, any amounts paid under the Families First Coronavirus Response Act (FFCRA) for sick leave or family leave cannot be included in determining qualified wages for purposes of the ERC.
It’s also worth noting that if an employee was furloughed or had their hours reduced but continued receiving healthcare benefits during this time period, these costs can be included when calculating qualified health expenses for the ERC.
In general, determining which wages qualify for the credit can be complex and may require consultation with a professional ERC/ERTC consultant or accountant.
ERC Calculation Process
To truly maximize your tax benefits and ensure you’re receiving the full amount of relief available to you, it’s essential that you understand the step-by-step process for calculating the ERC.
There are five different methods for calculating the employee retention credit, each with its own set of requirements and nuances. The most common method is to take 50% of eligible wages paid to each employee in 2020, up to a maximum of $10,000 per employee.
Once you’ve identified which wages qualify for the credit, you can begin the actual calculation process. This involves determining the total amount of qualified wages paid during each calendar quarter in which your business was affected by COVID-19 restrictions or experienced a significant decline in gross receipts compared to 2019.
You’ll also need to calculate any qualified health expenses incurred during those quarters and add them to your total eligible wages.
You must compare your current year’s gross receipts against those from 2019 using the Gross Receipts Test. If your gross receipts were less than 80% of what they were in 2019 during any quarter in 2021, then you may be eligible for an ERC refundable credit equal to 70% of qualifying wages paid during that quarter (up to $10k per employee).
It’s important to note that filing for this credit requires careful attention and precision; consulting with a professional ERC/ERTC consultant or accountant is strongly recommended before submitting an IRS claim.
Consultation and Resources
You’ll feel confident and empowered as you consult with a professional ERC/ERTC Tax Expert or accountant to ensure you’re taking full advantage of the available resources and maximizing your tax benefits.
These professionals can help guide you through the nuances and requirements of calculating the Employee Retention Credit (ERC), identifying qualifying wages, and determining the appropriate calculation method based on your specific circumstances.
By consulting with an ERC/ERTC Tax Expert or accountant and utilizing available resources, you can ensure that you’re accurately calculating your eligible credit amount and maximizing your tax benefits.
Don’t miss out on this valuable opportunity to potentially receive significant financial relief during these uncertain times.
Conclusion
In conclusion, the Employee Retention Credit (ERC) is a valuable tax credit that can help businesses retain their employees during challenging times.
To determine eligibility for the ERC, businesses must meet specific criteria, including experiencing a significant decline in gross receipts or a full or partial suspension of operations due to COVID-19. Once eligible, businesses can claim up to $5,000 per employee for wages and health expenses incurred between March 13th, 2020 and December 31st, 2021.
The ERC calculation process involves identifying qualifying wages and health expenses and using the Grass Receipts Test to determine the maximum credit amount. To assist with calculating the ERC, business owners can consult with a tax professional or utilize resources provided by the IRS.
With careful consideration and proper documentation of eligible expenses, businesses can claim the tax credit owed and keep their employees on payroll during these uncertain times.
