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How to Calculate Employee Retention Tax Credit (ERC)

by Brad Johnson on April 2, 2021
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You can earn a tax credit of up to $33,000 per employee in wages paid under the Employee Retention Credit (ERC) if your business was financially impacted by COVID-19. Read on to learn who is eligible for the Employee Retention Tax Credit (ERC), how to calculate ERC based on qualifying wages, how to claim it, and more. 

ERC - Who is an Eligible Employer?

ERC can be up to $33,000 per employee with the new stimulus bill extended the deadline to the end of 2021 (or $7K per quarter). That breaks down to a maximum of $28,000 for 2021 and the $5K that was already put into law for 2020.

Any private-sector businesses or tax-exempt organizations that carry on a trade or business that meets either of the following:

  • A business that was fully or partially suspended due to orders from the Federal or State government limiting commerce, travel or group meetings due to COVID-19; or,
  • A business that experienced a significant decline in gross receipts during any quarter:
    2020 2021
    Gross receipts declined by at least 50% of what they were for the same calendar quarter in 2019 Gross receipts declined by at least 20% in the first two calendar quarters of 2021 when compared to the same calendar quarter in 2019

     

Calculate the Credit Based on Qualifying Wages

Qualified wages may include the employee’s and the employer’s qualified health plan expenses that are properly allocated to the wages. A company may not benefit from claiming credits based on the same wages for the purposes of the ERC and:

  • PPP – Wages counted towards forgiveness
  • Wages used in calculating paid sick and family leave credits under the Families First Coronavirus Response Act (“FFCRA”) may not be considered Qualified Wages for the ERC
  • Work Opportunity Tax Credit (“WOTC”)
  • Research & Development Credit
  • Other Similar Wage Based Credits

    Qualified Wages are different depending upon whether your company has:
2020 2021
  • More than 100 employees: the credit is available only for compensation paid to employees who are “not providing services”.

  • Fewer than 100 employees: any
    compensation paid during the period when the operations were affected is eligible for the credit, whether or not the employees are providing services.

  • For compensation provided to an employee after March 12, 2020 and before January 1, 2021. 

  • More than 500 employees: the credit is available only for compensation paid to employees who are “not providing services”.

  • Fewer than 500 employees: any compensation paid during the period when the operations were affected is eligible for the credit, whether or not the employees are providing services. 

  • For compensation provided to an employee after December 31, 2020 and before July 1, 2021. 

 


How to Compute the 100/500 Employee for Purposes of the ERC?

Employee count for purposes of the ERC is based on the number of full-time employees during 2019, with full-time employees determined in accordance with Internal Revenue Code Section 4980H.

The term full-time employee means, with respect to a calendar month, an employee who is employed an average of at least 30 hours of service per week or 130 hours a month with an employer.

With respect to a month with four weekly periods, an employee with at least 120 hours of service is a full-time employee, and with respect to a month with five weekly periods, an employee with at least 150 hours of service is a full-time employee.

ERC Recap 2020 and 2021 – Potential Tax Credit of up to $33,000 per employee:

  2020 2021
Percentage or revenue decline (if not impacted by government order) 50% 20%
Credit Amount per Employee Up to $5,000 (for wages paid from March 12 - December 31, 2020) Up to $7,000 per quarter 
Wage/Credit Caps Applied Annually (50% x $10,000) Quarterly (70% x $10,000)
Potential Benefit per Employee Up to $5,000 annually Up to $7,000 quarterly; $28,000 annually

 

How to claim the ERC?

Reduce a quarter’s required payroll tax deposits on Form 941. The ERC is applied against the 6.2% employer’s share of Social Security taxes due on all wages paid to all employees for the quarter.

If an ERC is more than that amount, the ERC may offset against the rest of the payroll tax liabilities on Form 941 for the quarter and will request a refund.

If a company has already filed its Form 941 for that quarter without claiming an ERC, the company may file a Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return for previously filed periods.

Horizon Payroll Solutions can help you calculate the ERC credit and file for your payroll tax refund. We can help you obtain the largest credit you can for 2021, and also help you obtain unclaimed credits from 2020. Reach out to our experts today for ERC assistance.

Topics: Taxes