How to Calculate Employee Retention Credit (2023 Guide)

how to calculate Employee Retention Credit
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When the coronavirus pandemic plagued America, businesses and employees alike were both faced with a lot of uncertainty. To keep up with costs, some companies had to cut down on their employee wages, which caused even more problems for American citizens across the nation. Not only did they face becoming sick, but they also were stripped of their viable sources of income.

To help with this, the government enacted the employee retention credit to encourage businesses to keep their employees on the payroll. If you were a business affected by the pandemic and you want to know if you qualify or how to calculate qualified wages for employee retention credit, you came to the right place. Below, we will cover all you need to know about the ERC, how to calculate employee retention credit, and who you can contact for additional guidance.

What Is the Employee Retention Credit?

The employee retention credit is a credit created to encourage employers to keep their employees on the payroll. Qualified employers can claim up to 50% of their employee’s qualified wages in 2020.

In 2021, that rule increased how much each eligible employer could claim. Instead of 50%, they were able to claim up to 70% of their employees’ qualified wages.

How To Calculate Qualified Wages for Employee Retention Credit

Calculating these wages is simple, yet it can be pretty complex if this is your first time claiming the credit. Eligible businesses have the opportunity to claim 50% of their eligible employee’s wages between March 12, 2020, and before January 1, 2021. Employers can only claim up to $10,000 per employee per year per qualified employee.

For 2021, the retention credit allowed business owners to claim up to 70% of their employee’s qualified wages from January 1 of 2021, to December 31, 2021. The main difference between 2020 and 2021 was that instead of only being able to claim the year’s credit, employers could claim these qualified wages per quarter.

Who Qualifies for the Employee Retention Credit?

Eligible employers can claim this refundable tax credit under the ERC to help offset the cost of keeping their employees on the payroll. To receive the employee retention credit, a business must meet eligibility status under one of two main criteria. The first criterion is closure due to government order, and the second criterion is a decline in gross receipts.

Employee Retention Eligibility in 2020

The coronavirus pandemic put restrictions on group meetings, commerce, travel, and other things cause, causing businesses to either partially close or completely close down their businesses. Companies that were affected as a result of the government order may be able to claim the employee retention credit.

For example, if you own a restaurant, but a government order made you close your business down at a specific time because of a curfew, then you may be eligible. Another example would be if you had to close down your dining room area due to social distancing standards. If you had to change how you do business, such as taking take-out orders, this qualifies as well.

Decline in Receipts

If your business saw a decline in gross receipts in 2020 when compared to 2019, you qualify for the ERC. The decline must be 50% for any of the quarters in 2020; it just must be a 50% decline when compared to 2019. You remain eligible for the employee retention credit until your gross receipts return to greater than 80%.

Employee Retention Eligibility Rules 2021 (ERC)

The eligibility criteria for 2021 are quite similar to that of 2020. For example, any business that suffered economic hardship due to government order, causing them to change the way they do business or limit their business operations, qualified.

For 2021, businesses only needed to see a 20% decline in gross receipts when compared to 2020. The main purpose of the ERC was not only to keep employees on the payroll, but also to assist these essential workers with being able to have access to education, health care costs, and other essential obligations. Because businesses had a decline in business, they couldn’t keep up with the needs of their employees, causing them to have to cut wages.

What are qualified wages?

Full-time workers’ compensation are considered “qualified wages.” Any businesses that paid for these wages, despite the hardship of the pandemic, are qualified employers. Qualified wages include the employee’s wages and their health plan costs.

Full-time Employee Definition

In order to qualify as a full-time employee, businesses must check to see if their full-time worker falls under the IRS definition. Per the IRS, a full-time employee is someone who works over 30 hours per week or at least 130 working hours per month.

Businesses With Over 100 Employees in 2020

There is an additional rule for the ERC that you must be aware of if your enterprise has more than 100 employees. Under the ERC in 2020, businesses with less than 100 employees could claim the credit for working and non-working wages.

This meant that any money paid to the employee qualified for the ERC regardless of whether they were working or not. Those who had more than 100 were only able to claim wages paid to their employees when they were not clocked in. Businesses with more than 500 employees did not qualify for the credit.

Businesses With Over 100 Employees in 2021

In 2021, the number of money employers could claim was not the only thing that changed. Businesses with more than 100 employees could claim both the working and the non-working wages paid to eligible employees. Companies that had over 500 were only able to claim the non-working salaries paid to their employees.

How To Calculate Employee Retention Credit 2023

Many small businesses suffered greatly due to the pandemic and the many restrictions set by local, state, and federal government orders. For 2021, employers can take a 70% credit for each of their qualified employees per quarter.

This means for every eligible employee; you can claim up to $7,000 of their wages each quarter, resulting in about $28,000 per employee. This credit has the ability to reduce your employer’s social security taxes.

The ERC is one of the most successful tax measures that helped small and mid-sized businesses. As mentioned earlier, it also made it possible for tax-exempt organizations such as nonprofits and schools to manage the economic effects of the pandemic.

How To Claim the Employee Retention Credit

Eligible businesses have the opportunity to claim the employee retention credit in two ways. They can either claim the credit to reduce their tax liability or request an advance payment. Employers with more than 500 cannot receive the advanced payment.

To request the advanced payment, you must fill out the IRS Form 7200. You must first calculate the total amount of your eligible salaries and then subtract your quarterly deposits that respond to those wages and health insurance costs.

Calculating the employee retention on your own can be difficult, especially if you need help figuring out who is a full-time employee or what wages even qualify. To help with that, you can reach out to a qualified tax professional or a business that has expertise in filing the employee retention credit for more help.

Consideration for the Form 7200

In order to make sure that you get your advance payment on time, you have to ensure that the information you input is accurate and complete. Make sure that you put your Employer Identification Number correctly. If you fail to put that on the document or the wrong number, it could lead to an almost instant denial.

When filling out the form, check only one box for the quarter you’re applying for. Make sure that you double-check your math on lines 4, 7, and 8. Many businesses mistake checking several boxes for Part 1 Line A when they should only check one box.

You will need to complete part two by using the appropriate amount of eligible dollars, not eligible employees. There are several different lines in this part of the application, so make sure you double-check your math and ensure you put the correct dollar amount.

Last but not least, do not forget to sign the form. If you don’t, the system will kick back your application. Again, as mentioned earlier, there are viable resources available to help you fill out these forms, so you don’t have to. Filling them out can take a reasonable amount of time, and this document is unlike any other application.

Form 941-X

In order to send in your request for the tax credit, you have to fill out IRS Form 941. The employee retention credit program closed as of the end of 2021, which means that you cannot send in the traditional form. Instead, you can retroactively claim these credits with Form 941-X.

How Long Does It Take To Receive ERC Credits?

The timeline to receive your credit depends on several different factors. For example, the IRS is still currently working through the many other applications sent in for retroactive requests. Suppose you fail to accurately input the information on the document, which also can delay when you receive your tax credit.

Generally, it can take three to six months to receive anything back from the Internal Revenue Service. If they owe you a refund, they will send that to you as a check.

Restrictions on Employee Retention Credit Funds

Unlike other forms of aid, there are no restrictions on how you use the money received from the employee retention credit. You can use these funds to pay off debts, update your business, or however you see fit.

Can I Qualify for the ERC if I Take a PPP Loan?

The original instruction for the employee retention credit was that you could not claim the credit if you claimed a loan from the Paycheck Protection Program. Fortunately, you can claim the ERC, even if you took out a PPP loan. The only exception to this rule is that you cannot claim the credits or wages to be forgiven under the Paycheck Protection Program.

This is to ensure you don’t double dip and receive credit for money you already received forgiveness. To help you sort through what you can and cannot claim under the employee retention credit from the paycheck protection program, make sure you reach out to a reputable tax professional for more help.

Deadline To Claim the ERC

Even though the ERC program closed in 2021, employers still have the ability to claim employee retention credit. The Internal Revenue System gives all taxpayers three years from the date they initially filed to make changes on their tax returns.

This means that you have about three years to claim the credit on your business tax returns. It would be best if you worked on claiming the credit as soon as possible so you can receive your credits promptly.

Help With Claiming ERC Credits

Even though the ERC credit program closed, eligible businesses still have the opportunity to claim the credit retroactively. So long as your business meets the eligibility requirements, you can claim the employee retention credit.

Now that you know how to calculate qualified wages for employee retention credit, it is time to claim the credit you qualify for. Contact us now for assistance with filing out the forms on your behalf. Our team is here to answer any questions or concerns you have about the process and the timeline for when you should receive your credit.

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