To calculate the Employee Retention Credit (ERC) for 2021, you will need to determine the qualified wages paid to full-time employees between January 1st, 2021, and September 30th, 2021. The ERC is equal to 70% of these qualified wages, up to a maximum of $10,000 per quarter per employee. Most businesses can claim a maximum credit of $21,000 per year per employee.
Let’s break down the steps to calculate the ERC:
1. Determine Eligibility: First, ensure that your business qualifies for the ERC. The eligibility criteria may vary, but generally, businesses that experienced a significant decline in gross receipts or were subject to a full or partial suspension of operations due to government orders related to COVID-19 may be eligible.
2. Identify Qualified Wages: Qualified wages include wages and health plan expenses paid to full-time employees during the eligible period. Full-time employees are those who work an average of at least 30 hours per week or 130 hours per month. The wages eligible for the ERC depend on the size of the business.
3. Small Employers (Less than 500 employees): For businesses with fewer than 500 employees, all wages paid to full-time employees during the eligible period qualify for the ERC, regardless of whether the employees were providing services or not. This means that if you have 10 full-time employees and each of them was paid $2,000 per quarter, the total qualified wages for each quarter would be $20,000.
4. Large Employers (500 or more employees): For businesses with 500 or more employees, only wages paid to employees who were not providing services during the eligible period qualify for the ERC. This includes employees who were furloughed or had reduced working hours due to COVID-19. If you have 700 employees but only 100 were not providing services during the eligible period, you would calculate the ERC based on the qualified wages of those 100 employees.
5. Calculate the ERC: Once you have determined the qualified wages for each quarter, you can calculate the ERC. Multiply the total qualified wages by 70% to get the credit amount. Remember that the credit is capped at $10,000 per quarter per employee. For example, if the total qualified wages for a quarter are $20,000, the ERC for that quarter would be $14,000 (70% of $20,000).
6. Apply the Maximum Credit: you need to consider the maximum credit available per employee per year. Most businesses can claim up to $21,000 per year per employee. If the calculated ERC exceeds this limit, you will need to cap the credit at $21,000. However, if the calculated ERC is less than $21,000, you can claim the full amount.
It is important to consult with a tax professional or refer to the IRS guidelines to ensure you accurately calculate the ERC based on your specific circumstances. The above steps provide a general framework, but there may be additional factors and considerations that could affect the calculation.