How to Calculate Employee Retention Credit

Have you heard about the ERTC and wondering about calculation? ERTC stands for Employee Retention Tax Credit. This is a tax credit that provides financial assistance to businesses that retained employees during the COVID-19 pandemic. The ERTC is calculated based on the qualified wages paid by the business during the eligibility period. In this article, we’ll explore how the ERTC is calculated.

Step 1: Determine Your Eligibility

Before you can calculate the ERTC, you need to determine your eligibility. In order for a business to qualify for ERTC, the business must have had either a full or partial suspension of its operations due to government ordered shutdowns or restrictions related to COVID-19 or experienced a significant decline in sales. A significant decline in gross sales is defined as a drop of 20% or more when compared to the same quarter in the previous year.

Step 2: Calculate Your Qualified Wages

Qualified wages are defined as the wages and health plan expenses that a business paid to employees during the eligibility period. The amount of ERTC you can claim depends on the amount of qualified wages paid to your employees. If a business has less than 500 employees, the ERTC is equal to 50% of qualified wages paid between March 13th and December 31, 2020,and  70% between January 1st to December 31st, 2021. Businesses that are qualified can receive up to a maximum of $26,000 per employee. For businesses with more than 500 employees, the ERTC is equal to 50% of qualified wages paid during the same period, up to a maximum of $26,000 per employee.

When calculating your qualified wages, you need to determine the wages paid to each employee during the eligibility period. You can also include health plan expenses paid on behalf of each employee. The qualified wages are capped at $10,000 per employee per quarter.

Step 3: Calculate the ERTC

Once you have calculated your qualified wages, you can calculate the ERTC. If you have ten employees and you paid each employee $8,000 in qualified wages during the eligibility period, your total qualified wages would be $80,000. If your business has fewer than 500 employees, you would be eligible for an ERTC of 70% of $80,000, which is $56,000.

Step 4: Claim the ERTC

In order to claim the ERTC, you or your accountant will need to file IRS Form 941-x, the employer’s quarterly federal tax return. The credit is claimed on Line 11c of Form 941-x. If you’ve already filed Form 941 for the relevant quarter, you can file an amended return to claim the ERTC. You can also use Form 7200, Advance Payment of Employer Credits Due to COVID-19, to request an advance payment of the ERTC.

Correctly filing for ERTC is complicated and it’s recommended to use an experienced ERTC specialist or accounting firm. It’s also important to keep detailed records of your ERTC claim, including the amount of qualified wages paid to each employee and any other relevant information. You should also retain all supporting documentation in case of an IRS audit.

Conclusion

The ERTC can provide significant financial assistance to businesses impacted by the COVID-19 pandemic. However, calculating the ERTC can be a complex process. To calculate the credit, businesses must determine their eligibility, properly calculate their qualified wages, and apply the appropriate percentage. Additionally, businesses must file the appropriate forms with the IRS and keep detailed records of their ERTC claim. If you’re a business owner, it’s essential to seek professional advice to ensure accuracy.