You’re about to dive into the world of Employee Retention Credits (ERC). In this article, you’ll explore how to determine your eligibility, calculate your qualified wages, and figure out what percentage of credit you can claim.
It’s a complex process, but don’t worry – we’re here to guide you every step of the way. You’re not just learning to calculate your ERC, you’re potentially unlocking thousands in savings for your business.
Let’s get started!
Determining your eligibility for the Employee Retention Credit (ERC) involves assessing whether your business experienced a partial or full suspension due to COVID-19 economic shutdowns or a significant decline in gross receipts compared to 2019. This examination is crucial, as it sets the foundation for your ERC claim.
To start, examine your operation records during the pandemic. If your business was forced to close or limit operations due to a governmental order, you’ve met one of the ERC eligibility requirements. Be sure to document the specific ways the shutdown impacted your operations.
Next, compare your gross receipts from 2020 to those from 2019. If in any quarter of 2020, your gross receipts were less than 50% of that in the same quarter in 2019, you qualify for the ERC. You remain eligible until your gross receipts exceed 80% of the corresponding 2019 quarter.
For 2021, the gross receipts eligibility was adjusted. If your gross receipts in any 2021 quarter were less than 80% of the same quarter in 2019, you qualify. You don’t have to show a decline in subsequent quarters to remain eligible.
The ERC qualification process may seem complex, but don’t be deterred. Thoroughly reviewing your business’s operational changes and financial records is a necessary step in unlocking this valuable resource. If you’re unsure of your eligibility status, consider seeking professional guidance. Remember, the goal is to keep your business resilient during these challenging times and beyond.
To qualify for the ERC, you’ll need to understand and calculate your Full-Time Equivalent (FTE) employees. Full-time employees, according to the IRS definition for the ERC, average at least 30 hours of service per week or 130 hours per month.
Here’s how you can calculate your FTE:
The number of FTE you have directly impacts what wages can be considered qualified for the ERC. For example, if you’d 100 or fewer FTE in 2019, both wages paid to employees providing and not providing services are considered qualified for 2020. But if you’d more than 100, only wages paid to employees not providing services are qualified. In 2021, these thresholds changed to 500 FTE.
Calculating your FTE is a crucial step in claiming your ERC. Remember, the more accurate your calculations, the more precise your ERC claim will be, leading to maximum benefit from this credit.
Now that you’ve calculated your FTE, it’s time for the next step in your ERC credit journey: gathering the necessary documentation. This task requires precision and attention to detail, as ensuring you have the correct documents is crucial for the calculation and application process.
Start by locating your tax returns for 2020 and 2021. These documents provide evidence of your company’s financial health during the pandemic and can demonstrate your eligibility for the credit. They’ll show your gross receipts, a key factor in determining whether you qualify based on a significant decline in business.
Next, compile your payroll records for 2020 and 2021. These records should include details of wages paid to employees during the respective years. Remember, the ERC credit is calculated as a percentage of these wages, so ensure these records are accurate.
Also, gather records showing your profits for 2019 through 2021. If your business suffered a significant decline in gross receipts during any quarter in 2020 or 2021 compared to the same quarter in 2019, you may be eligible for the credit.
Lastly, you’ll need records showing the number of full-time and part-time employees in 2019 through 2021. This is vital because the rules for claiming the credit differ based on your company’s size.
Collecting these documents may seem tedious, but it’s an essential step in your ERC credit journey. With these documents in hand, you’re well-prepared for the next phase: filing for the ERC credit.
Now that you’ve gathered your necessary documents, let’s move on to calculating your qualified wages for the ERC.
For this, you’ll need to separately total your qualified wages for 2020 and 2021.
Calculating your total qualified wages for the Employee Retention Credit (ERC) in 2020 is a crucial step to ensure you maximize the credit you’re entitled to. Here’s a simple way to do this:
For example, if you paid five employees $25,000 each, the qualified wage for each is capped at $10,000. Therefore, your credit per employee is $5,000, totaling $25,000.
Carefully calculating your total qualified wages will help you accurately determine the size of your ERC.
Just as you’ve calculated your total qualified wages for 2020, you’ll also need to determine this amount for 2021 to take full advantage of the ERC.
Remember, in 2021, you can claim 70% of qualified wages of up to $10,000 per employee per quarter. This increases your potential credit to $7,000 per worker every quarter, or a yearly max of $21,000 per employee.
Let’s take an example. If you paid five full-time employees $30,000 each during the eligible period, you can claim the maximum $7,000 credit per quarter for each employee. That leads to a total possible ERC of $105,000 for the year.
To ensure accuracy in your ERC calculations, engage a trusted accountant or tax professional.
Understanding and calculating your ERC credit doesn’t have to be overwhelming.
Start by determining your eligibility, then calculate your FTE.
Gather the necessary documents and calculate your qualified wages.
Finally, claim your ERC credit confidently.
Remember, every dollar saved is a dollar earned for your business.
Keep up with these steps and you’ll be well on your way to maximizing your tax benefits.
