How to Calculate Your Employee Tax Credit

Employee Retention Credit
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It’s no secret that managing your tax obligations is something that you can never ignore as a business owner. Otherwise, you could find yourself dealing with a large number of complications, such as fines or penalties.

The Employee Retention Credit is a tax credit that aims to benefit entrepreneurs who keep employees on their payroll. By extension, this reduces the overall number of people who file for unemployment benefits.

Let’s take a look at how you can calculate it.

Did You Have Employees in 2020 or 2021?

If you did not employ workers during these years, then you are not eligible for this tax credit.

However, companies that did are able to take advantage of the ERC under most circumstances. Be sure that you keep this in mind before moving forward.

Did Your Company Experience a Qualifying Closure?

This term refers to a partial or full suspension during a calendar quarter of the above years.

To elaborate, let’s assume that your business was forced to shut down for six months in 2020. This means that you would have experienced a qualifying closure. However, this must have been the result of government mandates that prevented your company from holding meetings or traveling.

Put simply, these regulations must have limited your ability to conduct commerce. Otherwise, your company will not qualify.

Take a Look at Your Business Revenue From 2019

During 2020, your revenue must have experienced a decrease of greater than 50% compared to that of 2019. So, let’s assume that your business had revenue of $1 million in 2019.

In 2020, your revenue must be less than $500,000 in order for you to be eligible. In 2021, your revenue must’ve decreased by 20% or more.

This means that if your business had revenue of $500,000 in 2019, then it must have been less than $400,000 in 2021. Otherwise, you won’t be able to qualify for the employee retention credit.

Calculate Your Qualified Wages and Health Plan Expenses

This is relatively self-explanatory.

First, you need to calculate all of the wages that you paid to employees during the period of time in which your operations were suspended. This also applies to any quarter in which you experienced a sufficient decrease in revenue. Similarly, you should calculate health plan expenses that were paid to employees during this time.

What Restrictions Are There For Qualified Wages?

One of the most important restrictions to consider is whether or not you received a Paycheck Protection Program (PPP) loan. If you paid wages to your employees using this money, you do not qualify for the ERC.

You also cannot include any wages that were paid to immediate relatives of the business owner. As you might expect, you also cannot include wages that you have already claimed for other tax credits.

Otherwise, the calculations are relatively straightforward.

What About Health Plan Expense Restrictions?

It’s worth mentioning that there are several restrictions to consider when it comes to qualifying for this credit.

The first of these is the amount of money spent on your employees during the months in which they were suspended or had reduced revenue. You also cannot include any insurance premiums that you have already claimed for other tax credits.

In addition, you also cannot include expenses that were paid directly to a relative of the business owner.

What Sorts of Health Plan Expenses Can You Claim?

You may qualify for ERC if you paid health insurance premiums for your employees.

These expenses typically include the healthcare services, prescriptions, and coverage that you supplied for them under your company plan. However, you cannot include any health care benefits that you have already claimed for other tax credits.

How Do I Claim This Credit?

Typically, you’ll find this information on Form 5884 for 2020 and 2021 respectively. You can also include it with FUTA form 940.

First, be sure to indicate whether your business is claiming ERC or the other tax credit during the first quarter of 2022. Then, you must identify all of your relevant employees from these years as you would with any other tax credit.

Next, you need to calculate the appropriate wages and benefits that you expended during these periods of time. You must then exclude any of this information that doesn’t qualify for the credit. Finally, determine whether your business qualifies by checking whether it has experienced a qualifying closure within these years.

What Are Common Issues That People Have With Claiming the ERC?

The most common issue with claiming this credit is that companies often forget to change their status from the previous year.

They might also fail to include all of the relevant employees from those years, as required by law. In some cases, businesses may even claim a nonexistent tax credit. These issues only make the filings more complicated and increase your chances of receiving a penalty.

To help alleviate these problems, it’s best to work with a professional. This will allow you to ensure that you navigate the process correctly and are able to receive as much money as possible.

The Employee Retention Credit Can’t Be Overlooked

The employee retention credit can provide much-needed relief to plenty of business owners who were impacted during 2020 or 2021.

So, it’s essential that you take advantage of this opportunity if it applies to you. Keep the above guidelines in mind so that you can do so appropriately.

Want to learn more about what we have to offer? Feel free to get in touch with us at ERC Today and see how we can help.

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More Great Information For Employers:

On November 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act into law, and the Employee Retention Credit sunset date was moved from 12/31/2021 date to 9/30/2021 (for businesses other than ARPA Recovery Startup Businesses). 

HOWEVER, this does not mean the ERC was eliminated! Eligible businesses can still apply for stimulus funds based on financials between 3/13/2020-9/30/2021.