Key Takeaways:
- The employee retention credit helps qualifying employers keep their people on the payroll with a payroll tax credit
- For 2020, the limit was $5,000 per employee per year while for 2021, the cap is $21,000 per employee per year
- Businesses that received a loan through the payment protection program can still qualify
- Follow this seven-step process to calculate your employee retention credit accurately
American businesses continue to feel the impacts of the COVID-19 pandemic, as the job market and economy at large still seem to be on unsteady ground. Some estimates claim that there have been 200,000 extra permanent business closures because of the pandemic and the unemployment rate initially skyrocketed, only recently having lowered to pre-pandemic levels.
The pandemic caused the U.S. government to create a wide variety of relief initiatives for both individuals and businesses, including the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act created financial benefits for businesses, such as the Payment Protection Program (PPP) and other small business loan programs, as well as tax credits like the employee retention credit (ERC).
The ERC gives businesses an opportunity to lower payroll taxes and keep their employees. Although the program has ended, qualifying employers can still claim the credit.
The following is your guide to the employee retention credit, including a helpful employee retention credit worksheet so you can calculate your exact credit.
The Impetus behind the Employee Retention Credit
The ERC is a fully refundable payroll tax credit for employers that applies to qualifying wages paid to staff members during the covered periods. Initially this period was set as March 13, 2020, to December 31, 2020. The American Rescue Plan Act of 2021 then extended the period through December 31, 2021, but the program was ended early on September 30, 2021. However, if your business is a recovery startup, you could be eligible for the ERC through the end of 2021.
Officials created the ERC to encourage companies to keep their employees on the payroll. To qualify, employers must have fully or partially suspended operations because of a government order in 2020 or 2021, or must have experienced a steep decline in their quarterly gross receipts when compared to the same quarter in 2019. Wages paid during an eligible period qualify, with an eligible period being considered a quarter during which gross receipts were 50% less in 2020 than what was received in 2019, and 20% less for 2021.
For 2020, the ERC is 50% of qualified wages and the limit for each worker is $10,000 for all quarters. In 2021, the credit increased to 70% and the limit increased to $10,000 per quarter, with the annual limit set to $21,000 per employee per year.
The IRS sends out cash payments to issue the ERC, so it’s important to understand that it’s not treated as an income tax credit. The payment can be used by businesses to help them pay their payroll taxes.
How to Apply for the Employee Retention Credit
Applying for the ERC helps qualifying employers get substantial payroll tax credits that aim to encourage them to keep people on staff rather than facing layoffs. Although the program has ended and doesn’t apply to 2022 wages, you can still claim it retroactively for 2020 and 2021. Here are the steps to take when you’re considering claiming the ERC:
Understand Eligibility Requirements
Some good news about the ERC is that the majority of businesses qualify. Most businesses were impacted negatively by the pandemic, with many having to fully or partially shut down in 2020 or 2021. Make sure your business meets the requirements for loss in gross receipts when compared to 2019.
File the Right Form with the IRS
The form to use for the ERC is Form 941-X, Amended Quarterly Payroll Tax Return. Fill this out and submit it to the IRS.
File within Three Years
You may want to claim the ERC as soon as possible, but you have three years from the date of your initial tax return filing to submit it. You could potentially have until 2024 to take advantage of the ERC if you’re behind.
If you still have questions about whether you qualify for the employee retention credit and how to claim it retroactively, work with an ERC expert who can ensure you’re doing everything the right way.
3 Benefits of the Employee Retention Credit
The ERC gives you a great opportunity to keep people on your payroll. There are additional benefits to know about, thanks to legislation that came after the CARES Act. Here are a few more advantages of taking the ERC:
1. PPP Recipients Can Still Qualify
The Consolidated Appropriations Act of 2021 (CAA) specifies that even employers who received a PPP loan may now qualify for the ERC.
2. More Employers Qualify
The CAA also expanded the types of organizations that qualify for the ERC. Public colleges and universities, healthcare organizations, and organizations chartered by Congress can now take the ERC.
3. The “Large Employer” Definition Changed
For 2021, large employers are those with more than 500 employees, whereas in 2020 large employers were designated as having more than 100 employees. This means that more businesses are able to claim all wages paid to each employee to be considered qualified wages. For large employers, only wages paid to employees for not providing services are qualified wages.
More employers qualify with legislation updates, so you have a better chance of being eligible. Contact an ERC professional if you’re still not sure how to move forward.
Why You Should Calculate the ERC
The more information you have about your business finances and taxes, the better. You can calculate your employee retention credit so you know exactly where you stand and what to expect. The benefits of using an employee retention credit calculation spreadsheet include:
- Verifying whether you are a qualifying employer
- Knowing which quarters and which wages are eligible
- Determining exactly what your maximum credit will be for both 2020 and 2021
- Taking what you found to ERC tax experts who will verify everything for you and file the applicable forms
A helpful employee retention credit flowchart follows, which will walk you through everything you need to do to calculate your ERC. Contact tax experts who can help you answer any lingering questions you may have about eligibility, submitting tax forms, and how to calculate your credit.
Employee Retention Credit Worksheet Calculation
Understanding how the ERC works and all the rules for 2020 and 2021 are the first steps in claiming your credit. Now, sit down with pen and paper to start calculating what your ERC will actually look like. This helpful worksheet from ERC Today will walk you through the step-by-step process for calculating the ERC:
Step 1: Understand Which Quarters Qualify
Remember that all employers don’t qualify for the ERC, and you have to meet requirements for wages paid during specific timeframes. Here are those periods:
- 2020: Q2 (March 13, 2020 to June 30, 2020), Q3 (July 1, 2020 to September 30, 2020), and Q4 (October 1, 2020 to December 31, 2020).
- 2021: Q1 (January 1, 2021 to Match 31, 2021), Q2 (April 1, 2021 to June 30, 2021), Q3 (July 1, 2021 to September 30, 2021), and Q4 (for recovery startup businesses only: October 1, 2021 to December 31, 2021).
Step 2: Evaluate Your Eligibility:
If you had no employees in 2020 or 2021, you are not eligible.
2020 ERC Qualifications
Here are qualifications for the 2020 ERC:
- You were in operation before February 16, 2020
- You had 500 or fewer full-time W-2 employees in the applicable quarter
- Your business shut down fully or partially because of a government order,
AND/OR
you had at least a 50% loss in gross receipts during a qualifying quarter when compared to the same quarter in 2019
2021 ERC Qualifications
Qualification requirements for the 2021 ERC:
- You were in operation before February 16, 2020
- You had 500 or fewer full-time W-2 employees in the applicable quarter
- Your business shut down fully or partially because of a government order,
AND/OR
you had at least a 20% loss in gross receipts during a qualifying quarter when compared to the same quarter in 2019
Step 3: Determine if You Had a Qualifying Closure
Meeting the business suspension requirements is one piece of your eligibility assessment. You must have fully or partially suspended business operations in 2020 or 2021 because of a governmental order that restricted group gatherings, traveling, or commerce due to the COVID-19 pandemic.
However, even if you do not meet these closure requirements, you may still meet the loss in gross receipts requirement, listed above.
Step 4: Determine Business Status
Are you a recovery startup business?
- You are considered a recovery startup business only if you began operations after February 15, 2020 and have less than $1 million in total gross receipts
If so, you may be able to claim the ERC until December 31, 2021, instead of ending in September.
Step 5: Assess Your Qualified Wages for Each Year
Add up your qualified wages and expenses paid for health plans for all employees during your qualifying periods, when you were either closed or you had a decline in gross receipts.
If you are a large employer, you can only include wages and health plan expenses paid when an employee is not working because of economic hardship.
Step 6: Calculate the ERC for Your Business
Calculate Your 2020 ERC for each employee:
- The qualified wages limit is $10,000 per employee per year, and you can take up to 50% of that amount. In other words, the total ERC you can claim is $5,000 per employee per year.
Calculate Your 2021 ERC for each employee:
- The qualified wages limit is $10,000 per employee per quarter (not year), and you can take up to 70% of those wages. Therefore, the total ERC you can claim is $7,000 per employee per quarter, or $21,000 per employee per year (unless you are a recovery startup business, and your total would be $28,000 per employee per year).
Step 7: Look for Advanced Refund Eligibility
The ERC reduces the deposits you have to make for your taxes. You may be able to claim an advance refund of your ERC if you had 500 or fewer full-time employees and your credit amount is more than your total employment tax deposits for the given pay period. You will use Form 7200 for this advance refund.
You should now be ready to claim the appropriate ERC based on the periods your organization was suspended and wages paid to your employees. Make sure you report everything on Form 941-x to the IRS.
For ERC Worksheet Assistance, Contact ERC Today
Everything may not be completely straightforward when you’re trying to calculate your ERC on your own. This can especially be true if you have a lot of employees and are unsure which periods or wages qualify. It isn’t always easy to understand how the different forms of legislation have impacted what you can claim.
You need help from the experts. The ERC Today team is comprised of specialists who can answer any questions you have about the employee retention credit. We provide tax filing and consulting services to help you get everything submitted quickly. We’re committed to excellent customer support and getting to know your business’s unique situation.
Our team will assess your eligibility for the ERC and help you submit Form 941-x to the IRS. We know how important it is for your business to keep your workers on the payroll, so we’re here to help you get the tax credits you qualify for.
You can begin your ERC application online now to get started. Feel free to contact our team with questions about the employee retention credit.
