How To Calculate The Employee Retention Tax Credit

If you’re unsure about how to calculate the Employee Retention Tax Credit refund, this step-by-step guide is for you. After determining your ERC eligibility, you can use these tips to calculate how much money you can expect to receive from this refundable tax credit.

We’ll break down the percentages, maximums, and specific requirements for ERC-qualified wages to help you understand how much money you could be receiving back from the IRS once you file your 2020 and/0r 2021 Employee Retention Credit claim.

And if you don’t have time to calculate your ERC, you don’t have to miss out. Reputable ERC companies can help you calculate and claim your ERC refund. Start your search with our picks for the best companies for ERC refunds.

How Do I Calculate The Employee Retention Credit?

Once you’ve determined that you qualify for the ERC, you can begin to calculate the potential refund you can expect from the IRS.

The ERC is calculated based on the number of full-time employees you have and the amount of qualified wages you paid between March 15th, 2020, and September 30th, 2021.

Most businesses will not be eligible to claim the ERC for Q4 2021. However, you may be eligible if your business is a recovery startup business. To qualify as a recovery startup business, you must meet these requirements:

• Have at least one employee
• Have annual gross receipts that don’t exceed $1 million
• Must have started your business on or after February 15, 2020

Once you have calculated your full-time employees and the amount of qualified wages, you can calculate your estimated ERC refund.

How To Calculate The Employee Retention Credit In 5 Steps

To calculate your potential ERC, there are five important steps you have to take. You must determine if you’re eligible for the ERC, calculate the number of full-time employees your business has, gather the documentation proving your eligibility and full-time employees, calculate your qualified wages, and claim your ERC.

Read on to learn more about each step in detail.

Step 1: Determine Your Eligibility For The ERC

Businesses eligible for the ERC must meet several requirements, most notably:

• Your business must have experienced a partial or full suspension due to COVID-19 economic shutdowns OR
• Your business must have experienced a significant decline in gross receipts compared to 2019

If you are eligible, then you can move forward with applying to receive your ERC tax credit.

Read our full ERC qualification guidelines and learn about applying for ERC if you used a PPP loan to double-check that you can take this tax credit.

Step 2: Understand & Calculate FTE To Qualify For ERC

The next step in calculating ERC is to calculate your full-time employees (FTE).

For the purpose of the ERC, the IRS uses the definition of FTE given in the Affordable Care Act. An FTE employee for the ERC is defined as an employee who averages at least 30 hours of service per week or 130 hours per calendar month.

Once you’ve calculated the number of full-time employees, the following applies:

• In 2020, if you had 100 or fewer average FTE in 2019
  • Wages paid to employees providing services AND wages paid to employees not providing services are considered qualified wages.
• In 2020, if you had 100 or more average FTE in 2019
  • Wages paid to employees NOT providing services are considered qualified wages.
• In 2021, if you had 500 or fewer average FTE in 2019
  • Wages paid to employees providing services AND wages paid to employees not providing services are considered qualified wages.
• In 2021, if you had 500 or more average FTE in 2019
  • Wages paid to employees NOT providing services are considered qualified wages.

Step 3: Gather The Documents You Need To File For The ERC Credit

When you’re preparing to calculate your ERC, you’ll need to have the proper documentation on hand. Documents you may need include (but are not limited to):

• Tax returns for 2020 and 2021
• Payroll records for 2020 and 2021
• Records showing profits for 2019-2021
• Records showing the number of full-time and part-time employees in 2019-2021

Step 4: Calculate Your Qualified Wages For ERC

The definition of qualified wages is the same from year to year and calendar quarter to calendar quarter. These wages are the basis of the ERC and what you can expect to receive once you’ve applied for the ERC.

Total Qualified Wages For 2020

Qualified wages for 2020 must have been paid between March 13, 2020, through December 31, 2020. In 2020, businesses can claim 50% of qualified wages (up to $10,000 per employee). The total credit you can receive is $5,000 per employee for the year.

Let’s look at a quick example. You have five FTE that were each paid $25,000 during the eligible time period. Based on the 2020 rules for claiming ERC, you can claim 50% of qualified wages up to $10,000 per employee. In this case, you would be able to claim the maximum $5,000 credit for each employee, giving you a total credit of $25,000 for your five employees.

Total Qualified Wages For 2021

Qualified wages for 2021 must have been paid between January 1st, 2021, and September 30th, 2021, unless your business can be considered a recovery startup business, in which case the eligibility period ends on December 31st, 2021.

In 2021, businesses can claim 70% of qualified wages (up to $10,000 per employee) per quarter. This means that eligible businesses can claim a credit of $7,000 per employee per quarter, or a maximum of $21,000 per employee for 2021.

Here’s another quick example. You have five FTE that were each paid $30,000 during the eligible time period. Based on the 2021 rules for claiming ERC, you can claim 70% of qualified wages up to $10,000 per quarter per employee. In this case, you would be able to claim the maximum $7,000 credit per quarter for each employee ($21,000 per employee for the year). The total ERC you could claim is $105,000.

Step 5: Claim Your Employee Retention Tax Credit

If you missed out on claiming the ERC, you’re in luck. You can retroactively claim the ERC and receive your credit in the form of a refund check from the IRS. Deadlines for claiming your credit are:

• 2020 ERC: April 15, 2024
• 2021 ERC: April 15, 2025

There are two different ways for you to claim the ERC on your taxes.

1. You can choose to file an amended tax return on your own by filling out Form 941-X, which the IRS has updated to make it easy for small businesses to claim the ERC for 2020 and 2021 retroactively.
2. You can also work with a professional service or lender such as Lendio, which has partnered with ERC experts to offer business owners a much simpler application process. These professionals will typically verify your eligibility, complete your 941-X, file it with the IRS, and let you know a general timeline of when you will receive your ERC.

How To Calculate The Employee Retention Credit FAQs