How to Calculate the Employee Retention Tax Credit: Employee retention is a critical component of any successful business. Companies invest significant resources in hiring and training employees, and retaining these employees is crucial to maintaining a stable and productive workforce. To help incentivize employers to retain their employees, the Employee Retention Tax Credit (ERTC) was introduced.
The ERTC is a tax credit that allows eligible employers to claim a credit against their federal payroll taxes. The credit is equal to 70% of the qualified wages paid to employees during a specified period, up to a maximum of $7,000 per employee per quarter. In this article, we will provide you with a comprehensive guide on how to calculate the Employee Retention Tax Credit.
Eligibility Criteria
Before calculating the ERTC, it is essential to determine if your business is eligible for the credit. To qualify for the ERTC, your business must have experienced a significant decline in gross receipts or been fully or partially suspended due to a government order related to COVID-19.
The gross receipts test compares the business’s gross receipts for a calendar quarter in 2020 with the same calendar quarter in 2019. If the gross receipts have declined by more than 20%, the business is eligible for the ERTC. If your business was fully or partially suspended due to a government order, you are also eligible for the ERTC.
Qualified Wages
Once you have determined that your business is eligible for the ERTC, the next step is to calculate the qualified wages. Qualified wages are the wages and compensation paid to employees during the period that your business is eligible for the ERTC. The period of eligibility starts from March 13, 2020, and ends on December 31, 2021.
The amount of qualified wages that can be used to calculate the ERTC depends on the number of employees that your business has. For businesses with 500 or fewer employees, all wages paid during the eligibility period are eligible for the credit. For businesses with more than 500 employees, only the wages paid to employees who were not providing services during the eligibility period are eligible for the credit.
How to Calculate the Employee Retention Tax Credit?
To calculate the ERTC, you must determine the qualified wages for the eligibility period and then multiply that amount by the credit rate. The credit rate is 70% of the qualified wages, up to a maximum of $7,000 per employee per quarter.
Here’s an example of how to calculate the ERTC:
Suppose your business has 100 employees and is eligible for the ERTC. The qualified wages for the eligibility period are $1,000,000. The credit rate is 70%, and the maximum credit per employee per quarter is $7,000. The ERTC for your business would be calculated as follows:
($1,000,000 x 70%) = $700,000 ($7000 x 2 quarters) = $14,000 ($14,000 x 100 employees) = $1,400,000
Therefore, your business would be eligible for an ERTC of $1,400,000.
Summary
The Employee Retention Tax Credit is a valuable incentive for employers to retain their employees during the COVID-19 pandemic. To be eligible for the credit, businesses must have experienced a significant decline in gross receipts or been fully or partially suspended due to a government order. Once eligibility is determined, qualified wages can be calculated, and the ERTC can be calculated using the credit rate and maximum credit per employee per quarter.
We hope this guide has been helpful in understanding how to calculate the ERTC. If you have any further questions or need assistance in calculating the credit, please consult with a tax professional.
