How To Calculate The Employee Retention Tax Credit
Ready to calculate your ERC refund? Follow our step-by-step guide to calculating the employee tax retention credit to maximize your return.
Are you looking at the Employee Retention Tax Credit and trying to navigate how to calculate your refund? Read on to learn step-by-step how to calculate Employee Retention Credit (ERC)!
Once you’ve determined if your small business is eligible, you’re probably wondering how much money you can actually expect to receive from the ERC. 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!
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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.
One thing to note is that most businesses will not be eligible to claim the ERC for Q4 2021. However, you may be eligible if your business qualifies as a recovery startup business. To qualify as a recovery startup business, you must have at least one employee, have annual gross receipts that don’t exceed $1 million, and 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 need to meet several different criteria.
Your business must have experienced a partial or full suspension due to COVID-19 economic shutdowns OR a significant decline in gross receipts compared to 2019 and continued to pay at least 80% of your employees. If you are eligible, then you can move forward with applying to receive your ERC tax credit.
Step 2: Understand & Calculate FTE To Qualify For ERC
The number of FTE is important to small businesses because it will determine what qualified wages you’re able to claim when applying for the ERC. FTE stands for “full-time employee.”
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.
- In 2020, if you had 100 or fewer average FTE in 2019, wages paid to employees providing services and not providing services are considered qualified wages. If you had 100 or more average FTE in 2019, wages paid to employees NOT providing services are qualified wages.
- In 2021, if you had 500 or fewer average FTE in 2019, wages paid to employees providing services and not providing services are considered qualified wages.
- If you had 500 or more average FTE in 2019, wages paid to employees NOT providing services are 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 make sure you have the proper documentation on hand. It will feel a lot like you’re preparing to file your taxes!
Documents you may need include (but are not limited to):
- 2020 and 2021 tax returns (include previous years as well if you’re filing after 2022)
- 2020 and 2021 payroll records
- 2019-2021 records of profits
- Record of 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.
Learn more about qualified wages in our article How To Determine Qualified Wages For The Employee Retention Tax Credit.
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).
For example, if you paid $400,000 to 17 FTE during the eligible time period, you can claim $170,000.
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).
For example, if you paid $950,000 to 23 FTE during the eligible time period, you can claim $230,000.
Step 5: Claim Your Employee Retention Tax Credit
Now, you may be wondering what all of this has to do with you since it’s now 2022, and you didn’t claim the ERC in 2020 or 2021. Don’t worry! You can retroactively claim the ERC for these years until April 15th, 2024 and April 15th, 2025, respectively.
There are two different ways for you to claim the ERC on your taxes.
- You can choose to file an amended tax return on your own by using Form 941-X, which the IRS has updated to make it easy for small businesses to claim the ERC for 2020 and 2021 retroactively.
- 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. Lendio quotes two to eight months.
Check out our full list of the best companies to work with for ERC funding if you’re looking to simplify your ERC application process and gain peace of mind about correctly calculating your maximum ERC refund.