In March 2020, Congress created the Employee Retention Tax Credit (ERC) to help businesses that were adversely affected by the COVID pandemic. The credit refunds a company for wages paid to employees.
The goal of the program is to support small companies struggling during the pandemic to not lay off their employees. However, almost 18 months after the program was created, Congress is trying to end the program earlier than planned. Originally the program was supposed to run through the end of 2021, but with recently proposed legislation, Congress has suggested discontinuing the program after third-quarter payroll returns are filed in October 2021. The reason is that more established companies have the resources to know about and claim the credit, while many small business owners do not know the credit exists or know how their business may qualify for the credit.
Below, we will outline which types of businesses can qualify for the credit, how the credit is calculated, and how the credit is claimed. If you feel your company may qualify for the credit, we encourage you to reach out to your tax advisor as soon as possible before the program ends. The information discussed below is a high-level overview of the credit and there are potentially a lot more details to determine if your business actually qualifies for the credit.
Which Types of Business can Qualify for the Employee Retention Tax Credit
- A business with under 500 employees on average in 2019 and who experienced at least a 20% decline in gross revenue during any quarter in 2021 when compared to the same quarter in 2019
- A business with under 100 employees on average in 2019 and who experienced at least a 50% decline in gross revenue during any quarter in 2020 when compared to the same quarter in 2019
- A business who began carrying on a trade or business after February 15, 2020, and has average annual gross receipts of under $1 million
- A business with more than 500 employees who paid qualifying wages to furloughed employees or employees who were unable to work during a quarter in 2020 or a quarter in 2021
- A company with under 500 employees on average in 2019 who experienced a full or partial suspension of operations due to government orders limiting commerce, travel, or group meetings.
How is the Employee Retention Tax Credit Calculated?
The easiest way to calculate the credit is to first determine which quarters between the first quarter of 2020 and the third quarter of 2021 the company qualifies for the credit.
Calculating the ERC in 2020
If the company qualifies for the credit during one or more quarters in 2020, the credit is calculated by multiplying the qualifying wages paid to an employee during the qualifying quarter, up to $10,000, by 50%. If the company qualified for the credit during multiple quarters in 2020, the company could claim the credit for each employee until the $10,000 wage limit is met. The maximum credit per employee during 2020 is $5,000.
Calculating the ERC in 2021
In 2021, the credit became more lucrative. Unlike in 2020 when the qualifying wages amount is in effect for the entire year, the 2021 credit allows the employer to take up to $10,000 in qualified wages each quarter. In addition, the percentage of qualifying wages eligible for the credit increases from 50% to 70%. In other words, the maximum amount of credit a company can claim for an employee is $7,000 in each quarter. If a company were to claim the credit for three quarters in 2021, the maximum credit per employee would be $21,000 for the year.
As an example, if your business had 95 employees in 2020 and 2021 and every one of them qualified for the credit in 2020 and the first three quarters in 2021, your business could potentially receive a total Employee Retention Credit of $2,470,000. The calculation can be seen below:
- 2020 Calculation: 95 * $5,000 = $475,000
- 2021 1st Quarter Calculation: 95 * $7,000 = $665,000
- 2021 2nd Quarter Calculation: 95 * $7,000 = $665,000
- 2021 3rd Quarter Calculation: 95 * $7,000 = $665,000
How is the Employee Retention Tax Credit Claimed?
The credit is claimed on Form 941, Employer’s Quarterly Federal Tax Return. This is the form where a company reports and pays payroll taxes. If a company determines it is eligible for the Employee Retention Credit and has already filed Form 941 for the quarter, the company can file an amended return on Form 941-X to claim the credit.
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