The Employee Retention Credit (ERC) – How to qualify and calculate the credit?
The ERC was created as part of the CARES Act as a temporary coronavirus-relief provision to assist businesses in keeping employees on payroll. Since its enactment the ERC has been expanded and extended through December 31, 2021.
The ERC is a credit that first offsets payroll taxes and then is refundable. Employers can receive a benefit of up to $5,000 per employee in 2020 and up to $28,000 ($7,000/quarter) per employee for 2021.
How do I qualify?
There are two ways for an employer to qualify for the ERC. The first is to have the requisite decline in revenue for any eligible quarter in in 2020 or 2021. The second is if your business has a full or partial suspension under government orders.
The revenue decline test differs for 2020 and 2021. For 2020 the revenue decline must be 50% as compared to revenue for the same quarter in 2019. For 2021 the revenue decline must be 20% for any quarter as compared to the same quarter in 2019. There are nuances in the rules that may allow for qualifications in a quarter if the previous quarter qualifies.
The full or partial suspension of your business under government orders is the second way to qualify for the ERC. This test is more complicated to analyze. An employer needs to examine the government orders for all locations they operate in and determine if any significant portion of their business was fully or partially suspended.
How do I calculate the credit?
The credit is calculated differently based on the year your business qualifies and number of employees you have.
In 2020 the credit will be calculated by taking 50% of the first $10,000 of qualified wages. The credit is limited to $5,000 per employee for all of 2020. If an employer has less than 100 employees in 2020 and qualifies for the credit, all wages for every employee qualify for the credit during the qualification period. If the employer has more than 100 employees only the wages paid to employees that were being paid for time they were not working during the qualification period count toward the calculation.
In 2021 the rules changed and are more advantageous to the employer. The credit was increased from 50% of qualified wages to 70% of qualified wages. Additionally, the credit limit was increased from $5,000 for the year to $7,000 per quarter. Therefore, the limit for 2021 is now up to $28,000 per employee. Another material change was the increase in the employee limit from 100 to 500. In 2021 if you had less than 500 employees and you qualify for the credit all employee wages up to the $10,000 per quarter limit qualify for the credit. If the employer has greater than 500 employees, only the wages paid to employees that were being paid for time they were not working during the qualification period count toward the calculation.
What information would be needed in order to determine qualification?
- Summary of quarterly revenue
- Quarterly payroll tax returns
- Detail by employee of wages paid by date
- Location of business operations and employees
- Summary of lines of business (products, services, business lines)
- Detail of wages used for Paycheck Protection Program (if applicable)
- Detail of wages to paid to employees for time spent not working (for example reduced schedule)
How can True Partners Consulting help?
- Determine if the employer qualifies, and if so, for which quarters
- Determine which employee wages qualify
- Calculate credits, including estimates for current and future quarters
- Prepare form 7200 for employer to submit to IRS to receive advances
- After the quarter has ended, calculate the actual credits earned
- Reconcile actual credits with advance credits requested
- Prepare reconciled data for Form 941-X
- Document the credit eligibility and calculations for the employer’s records
Please contact a member of your engagement team to take advantage of this opportunity!