Calculating the employee retention credit (ERC) is simultaneously straightforward and complicated, and any kind of miscalculation can lead to problems.
The laws guiding the ERC continue to evolve, and even if you know how to calculate the employee retention credit in 2021, it’s not the same as calculating 2020’s claim.
In addition, rolling deadlines for filing apply, and competing factors must be considered.
We make understanding how to claim the ERTC a lot easier to understand in this guide, so let’s get into it.
How to calculate employee retention credit for 2021
To calculate the employee retention credit for 2021, you need to ensure you qualify via meeting financial setback criteria, had less than 500 employees, identify your qualifying wages and then calculate the ERTC value you’re entitled to using those qualified wages. You then must file your return timely.
Even though this seems relatively easy to understand, let’s look at the exact steps in more detail since there’s more nuance to this:
1. Qualifying to apply for 2021
To apply for the ERC, your business must have suffered a financial setback during the 2021 quarters for which you’re seeking credit, and for this to apply, you must have experienced one of the following:
You suspended business operations either completely or partially as a result of a relevant federal, state, or local ordinance or mandate in the 2021 financial quarters for which you’re applying.
As a result of the pandemic, you experienced a significant decline in your gross business receipts in the 2021 financial quarters for which you’re applying.
A significant decline in gross receipts in this context means that you brought in at least 20% percent less in a specific financial quarter in 2021 compared to the corresponding quarter in 2019. This is called the “gross receipts test.”
Check out our guide on employee retention credit eligibility for more advice on this!
2. Determining employee qualifications
For 2021, you can’t have employed more than 500 employees for each quarter that you seek the ERC credit.
Additionally, you must have filed a 941 for each quarter that you seek an ERC.
3. Identifying wage qualifications
Those employee wages that qualify for the ERC include all earnings that were subject to FICA and all health plan expenses that were paid by the employer on behalf of their employees.
The applicable wages must have been received from January 1 to September 30, 2021, which represents the first three financial quarters in 2021.
For ERC calculation purposes, these wages are capped at $10,000 per employee per quarter.
4. Calculating credits for 2021
The ERC applies only to the first three financial quarters of 2021, and the eligible wages for each of these quarters are calculated at 70%.
As such, the credit per employee per quarter maxes out at $7,000.
5. Timely filing for 2021
While the ERC is retroactive, there is a time constraint involved. You have three years from the 2021 financial quarter’s 941 due date to file your corresponding ERC, which is accomplished by filing a 941-X—an amended 941 or refundable claim.
The following quarterly deadlines apply to 2021:
Q1: April 30, 2024
Q2: July 31, 2024
Q3: October 31, 2024
Check out our employee retention credit application guide for further advice on the actual application process and what you need to do next!
2021 ERC calculation example
The best means of better understanding how the ERC is calculated for 2021 is by considering an example. Let’s focus on Company A, which employed 200 workers throughout 2021 and experienced significant financial setbacks in each of the year’s first three quarters, qualifying them to pursue an ERC each quarter.
Let’s walk through this 2021 ERC calculation example:
1. Applying the employee-count restriction for 2021
Because Company A had 200 employees on its roster throughout 2020, it qualifies for the ERC in relation to the number of workers employed for the first three quarters.
From here, each employee’s qualifying wages must be calculated.
2. Calculating qualifying wages for 2021
The next step in the process is calculating the amount of qualifying wages each of Company A’s employees earned for each of the first three quarters in 2021.
Qualifying wages refer to all FICA wages and all health plan expenses paid by the employer, up to $10,000 per employee per quarter.
In Company A’s case, each of their employees exceeded the maximum, which means that the company can assign each of their 200 employees $10,000 in qualifying wages.
3. Crunching the numbers for 2021
Since each employee maxed out in terms of qualifying wages and because Company A is entitled to a 70 percent credit for the year, they’ll calculate as follows:
Amount per quarter: Each employee has $10,000 in qualifying wages per quarter, and 70% of this amount is $7,000 per quarter.
Amount per employee: Since Company A is eligible for the ERC for all the available quarters, each employee’s quarterly credit is multiplied by 3, which equals $21,000 per employee for the year.
Total annual amount for 2021: Because Company A has 200 employees who earned ERC-qualifying wages, they’re eligible for 7,000 x 200 = $1,400,000 in ERC per quarter, which, when multiplied by 3, totals $4,200,000 for the year.
While this is obviously an oversimplification, it highlights how the employee retention credit applies in 2021 and demonstrates its financial significance for qualified employers whose small businesses took a serious financial hit during the pandemic.
4. Timely filing
To ensure they receive the ERC to which they are entitled, Company A must file a 941-X for each of the first three quarters in 2021, adhering carefully to the three-year time constraint for each.
2020 ERC calculation
The deadline for the first quarter in 2020 has already come and gone. While the final three quarters for 2020 remain eligible for the ERC, Q2 2020’s deadline of July 31, 2023, is fast approaching. The calculation process for 2020 differs from 2021, which makes paying careful attention key.
1. Qualifying to apply for 2020
If your business operations were fully or partially suspended as a result of a state or local ordinance or mandate in any of the last 3 quarters in 2020, you can proceed to other qualifying factors.
If this isn’t the case, however, you’ll need to pass the gross receipts test, which is not only a higher financial bar in 2020 but also involves more complex procedures.
To qualify, your business must have seen a reduction in gross receipts that exceeds 50% of the corresponding quarter in 2019, but this isn’t the end of the matter.
Once you have a quarter that meets this requirement, your business remains eligible for subsequent 2020 quarters. This is until the first quarter after your gross receipts exceed 80% of the corresponding quarter in 2019.
This means that you qualify for the ERC in 2020 from the first quarter that your gross sales dipped below 50% percent of your corresponding 2019 proceeds and for each following quarter that your gross sales don’t exceed 80% percent of your corresponding 2019 proceeds.
Once a quarter surpasses this 80% percent mark, however, any subsequent quarters in 2020 are ineligible for the ERC.
2. Assessing the employee-count restriction for 2020
The cutoff for the number of workers your business employs in 2020 is far more restrictive than it is for 2021.
In 2020, those companies that employ more than 100 workers do not qualify for the ERC.
3. Identifying qualifying wages for 2020
The same wage qualifier for 2021 applies in 2020. This means that you can calculate your credit based on each employee’s FICA wages and employer-paid health insurance, up to $10,000 total per employee per quarter.
4. Doing the math for 2020
The calculation rate for 2020 is 50% percent, rather than the 70% calculation rate used for 2021.
As such, employers are eligible for a credit that is calculated at 50% percent of each employee’s qualifying wages, up to $10,000 per quarter.
5. Filing timely and compliant for 2020
The first quarter for 2020 is no longer eligible for the ERC, and the deadlines for subsequent quarters are marching swiftly forward, including:
Q2: July 31, 2023
Q3: October 31, 2023
Q4: January 31, 2024
Timely filing for the ERC is critical to eligibility.
Employee retention tax credit example for 2020
Let’s consider Company B, which is eligible for the ERC in terms of the gross receipts test for each quarter in 2020 and had 50 employees on the roster throughout the year. Further, let’s say that each of the 50 employees’ eligible earnings exceeded the $10,000 cap for each of the quarters.
As such, all the following considerations apply:
Qualifies in terms of the number of workers it employs.
Calculate its ERC at 50% percent of each employee’s eligible earnings per quarter, which we’ve already determined is $10,000.
Qualifies for a $5,000 credit (50% of $10,000) per employee per quarter.
Total credit comes in at $250,000 ($5,000 multiplied by 50 employees) per quarter.
Company B’s ERC for 2020 is $750,000 ($250,000 for each of the 3 quarters)
To receive a credit for each of the three remaining quarters in 2020, Company B is responsible for filing a 941-X before each quarter’s corresponding due date passes.
How to calculate ERC credit with PPP
Originally, companies that benefited from the Paycheck Protection Program (PPP) were barred from claiming the creidt. With the Consolidated Appropriations Act in late 2020, however, this changed. Employers who received PPP are eligible for the ERC – but only for those qualifying wages that were not paid with PPP funds.
To avail yourself of both, keep each of the following steps in mind:
Employees: No more than 100 in 2020 and no more than 500 in 2021.
FICA wages: You also must have paid your employees’ qualifying FICA wages, which can include employer-covered health insurance premiums.
Wages not paid by PPP: All your employees’ qualifying wages that weren’t covered by PPP and that meet the ERC’s parameters for the year in question are eligible for the ERC.
ERC credit calculation: Tips and tricks
The ERC is a retroactive tax credit with looming end dates that you don’t want to miss out on if you qualify.
Fortunately, there are several tried and true tips and tricks that can not only help you take advantage of the ERC but can also help you maximize it:
1. Don’t miss out
The most important consideration to keep in mind is that you shouldn’t miss out on the ERC simply because you’re not sure if you qualify or because you haven’t gotten around to checking.
If there’s a chance that you qualify, you owe it to your company’s bottom line to discuss the matter with a savvy tax attorney.
2. Don’t forget your part-time employees
An eligible employer shouldn’t just focus on the full-time employee payroll impact. The IRS affords businesses an ERC break when it comes to part-time employees.
While these employees aren’t included in your overall employee count, for the purposes of qualifying, their wages can be included in your credit calculation.
3. Remember that applicable deadlines are rolling
It’s important to remember that there is a separate deadline for each eligible quarter in both 2020 and 2021.
In fact, Q1 for 2020 has already passed, and each quarter will continue to drop off as 2023 and 2024’s financial quarters pass. The time to take action is now!
4. Be mindful of the work opportunity tax credit
Because it’s a federal tax credit, the ERC comes with a vast array of rules and regulations that can easily trip you up.
For example, if any of your employees qualify you for the work opportunity tax credit, you’re barred from including those employees in your employee retention credit calculation.
Reach out for an experienced California tax attorney’s skilled guidance
The ERC affords many businesses significant tax credits, but the path forward can be challenging.
Because the ERC is always subject to change and has already been amended three times, proceeding with care is advised. The focused California tax attorneys at Brotman Law have the insight and experience to help you maximize your credit within the exacting constraints of tax law.
For more information, don’t wait to contact or call us today.