Ertc Calculation Made Easy

Understanding ERC (Employee Retention Credit)

The Employee Retention Credit (ERC) is a refundable tax credit designed to encourage businesses to keep their employees on the payroll during the COVID-19 pandemic. The credit is calculated based on the qualified wages paid to employees during the pandemic period. In this article, we will break down the ERC calculation process to help you understand how to claim this credit.

Eligibility Criteria

To be eligible for the ERC, your business must meet the following criteria:

• Gross Receipts Test: Your business must have experienced a significant decline in gross receipts during the pandemic period. For 2020, this means a 50% decline in gross receipts compared to the same quarter in 2019. For 2021, this means a 20% decline in gross receipts compared to the same quarter in 2019.
• Full or Partial Suspension: Your business must have been fully or partially suspended due to a government order related to COVID-19.

Calculation of Qualified Wages

Qualified wages are the wages paid to employees during the pandemic period that are eligible for the ERC. The calculation of qualified wages is as follows:

• 2020: Qualified wages are the wages paid from March 13, 2020, to December 31, 2020.
• 2021: Qualified wages are the wages paid from January 1, 2021, to June 30, 2021.

The qualified wages include:

• Wages paid to employees who were furloughed or had their hours reduced
• Wages paid to employees who continued to work during the pandemic period
• Wages paid to employees who were rehired after being furloughed or laid off

The qualified wages do not include:

• Wages paid to employees who were not affected by the pandemic
• Wages paid to employees who were hired after the pandemic period

ERC Calculation

The ERC is calculated as a percentage of the qualified wages paid to employees. The percentage is as follows:

• 2020: 50% of qualified wages up to $10,000 per employee
• 2021: 70% of qualified wages up to $10,000 per employee per quarter

The ERC is capped at 5,000 per employee for 2020 and 21,000 per employee for 2021.

Example Calculation

Suppose your business paid $50,000 in qualified wages to employees in 2020. The ERC would be calculated as follows:

• 50% of 50,000 = 25,000
• Since the ERC is capped at 5,000 per employee, the maximum ERC would be 5,000 per employee.

If you have multiple employees, you would multiply the number of employees by the maximum ERC per employee.

How to Claim the ERC

To claim the ERC, you will need to file Form 941-X with the IRS. You can also claim the ERC on your original Form 941, but you will need to file an amended return.

📝 Note: You can claim the ERC for both 2020 and 2021, but you must file separate returns for each year.

Important Notes

• Deadline: The deadline to claim the ERC is three years from the date of the original return.
• Amended Return: If you have already filed your original return, you will need to file an amended return to claim the ERC.
• Documentation: You will need to keep documentation to support your ERC claim, including payroll records and proof of qualified wages.

Conclusion

The ERC calculation process can be complex, but by following the steps outlined in this article, you can claim this valuable credit and receive a refund for qualified wages paid to employees during the pandemic period. Remember to keep accurate records and documentation to support your ERC claim.