Learn How to Calculate the Employee Retention Tax Credit: A Comprehensive Guide
The Employee Retention Tax Credit (ERTC) is a valuable incentive for employers in maintaining their workforce during challenging economic times. This tax credit, established under the CARES Act, provides relief to qualifying employers who have experienced significant declines in revenue or faced full or partial suspension of operations due to COVID-19. In this comprehensive guide, we will walk you through everything you need to know about calculating the Employee Retention Tax Credit, including eligibility criteria, maximum credit amounts, and step-by-step instructions.
Employee Retention Tax Credit Eligibility Criteria
To qualify for the ERTC, an employer must meet one of the two following conditions:
- Operations were fully or partially suspended due to a government order related to COVID-19, or
- Experienced a significant decline in gross receipts compared to the same quarter in the previous year.
It's important to note that certain government entities, such as federal agencies and state governments, are not eligible for the ERTC. Furthermore, businesses that received Paycheck Protection Program (PPP) loans are also not eligible to claim the credit.
Wages paid by an eligible employer to employees during applicable time periods are considered “qualified wages” for calculating the ERTC. The definition of qualified wages depends on the size of the employer:
- For employers with 100 or fewer full-time employees, all employee wages are considered qualified, regardless of whether the employee was working or not.
- For employers with more than 100 full-time employees, qualified wages include only those paid to employees who were not providing services due to COVID-19-related circumstances.
Calculating the Employee Retention Tax Credit
The ERTC is calculated on a per-employee basis for each calendar quarter. The maximum amount of credit available depends on the applicable time period:
- 2020: Up to 50% of qualified wages, with a maximum credit of $5,000 per employee for the entire year;
- Q1 and Q2 of 2021: Up to 70% of qualified wages, with a maximum credit of $7,000 per employee per quarter;
- Q3 and Q4 of 2021: Up to 60% of qualified wages, with a maximum credit of $4,000 per employee per quarter.
To accurately calculate your business's ERTC, follow these step-by-step instructions:
Step 1: Determine Employee Eligibility
Identify which of your employees are eligible based on their hours worked or if they were unable to work due to COVID-19 related circumstances during the applicable quarter. Remember, eligibility requirements differ based on the size of your workforce.
Step 2: Calculate Qualified Wages
For each eligible employee, total up their wages (including cash compensation and certain employer-provided health plan costs) during the applicable quarter. Ensure that you do not exceed the maximum wage limits based on the time period:
- 2020: $10,000 per employee for the entire year;
- Q1 and Q2 of 2021: $10,000 per employee per quarter;
- Q3 and Q4 of 2021: $6,667 per employee per quarter.
Step 3: Apply the Appropriate Credit Percentage
Multiply each employee's qualified wages by the applicable credit percentage for the time period:
- 2020: 50%;
- Q1 and Q2 of 2021: 70%;
- Q3 and Q4 of 2021: 60%.
Step 4: Calculate the Total ERTC
Add up the calculated credits from Step 3 for all eligible employees to determine your total Employee Retention Tax Credit for the applicable quarter. Remember to consider the maximum credit limits per employee based on the time period:
- 2020: $5,000 per employee for the entire year;
- Q1 and Q2 of 2021: $7,000 per employee per quarter;
- Q3 and Q4 of 2021: $4,000 per employee per quarter.
Claiming the Employee Retention Tax Credit
To claim the ERTC, eligible employers must report their total qualified wages and the corresponding tax credit on their quarterly employment tax return, Form 941 (Employer's Quarterly Federal Tax Return). If an employer anticipates receiving the credit before filing their return, they can reduce their federal employment tax deposits by the anticipated credit amount.
It's essential to maintain thorough records of your employee wages and any related health plan costs, as well as documents supporting your eligibility for the ERTC. This documentation will be vital for claiming the credit on Form 941 and may also be necessary if your business faces an audit or examination by the IRS.
The Employee Retention Tax Credit is a valuable source of financial relief for eligible employers during challenging times caused by COVID-19. Understanding the eligibility criteria and learning how to calculate the ERTC are essential steps in maximizing this benefit for your business. By following the step-by-step instructions provided in this guide, you'll be well-equipped to claim the credit and support your workforce through these uncertain times.