How the Employee Retention Credit Works and Is Calculated

The COVID-19 pandemic was rough for small companies. Many companies have had to close down. The ones that survived had to make major changes to keep running. The federal government took notice of the effects of the pandemic. It sought to provide relief to businesses that were struggling to stay open. In 2020, the CARES Act was passed in response to the pandemic. It contains the Employee Retention Credit provision.

As a small business owner, you might be able to take advantage of this provision. Read on to learn how it works and if you might be eligible to apply.

What Is the Employee Retention Credit

The Employee Retention Credit is a refundable tax credit. The credit covers “qualified wages” paid to retained full-time employees. Wages do include certain health insurance costs.

It’s aimed at encouraging business owners to keep their employees on the payroll. This helps to reduce the number of workers who become unemployed.

The goal is to have fewer workers file for unemployment benefits. This can help to lessen the burden on the government.

When this credit first went into effect, it allowed employers to claim 50% of qualified wages paid. It covered up to $10,000 per employee. The wages covered had to be paid between March 13 and December 31, 2020.

The Consolidated Appropriations Act extended the credit. Per this act, employers can claim a credit against 70% of qualified wages paid.

The American Rescue Plan Act, which was enacted in 2021, also expanded this credit. Under this act, the credit remains the same. However, this law does allow certain startup businesses to claim the credit.

Which Employers Qualify for the Employee Retention Credit

Which employers can qualify for this credit? The list of employers includes colleges and hospitals. Other employers that can also be eligible include 501(c) organizations.

To qualify, employers must be able to prove they experienced a significant decline in gross income. Employers must also prove that their business was fully or partially suspended by government orders.

Employee Retention Tax Credit Calculation

This is one of the business tax credits you need to know a lot about. If you want to claim it, you need to know how to calculate it. Calculations can get tricky, but with this guide, you’ll learn how to do it the right way.

Start by looking up your business revenue in 2019. Then, compare it to the period for which you seek to claim the credit.

For quarters in 2020, your revenue should have dropped by more than 50% to qualify. For quarters in 2021, the drop should be more than 20%.

Next, enter qualified wages paid to all employees. Once done, you can claim the credit on your tax returns. You’ll need to complete Form 941 to claim.

Want to learn if you qualify? Visit https://erctoday.com/erc-application/ to fill out an application.

Take Advantage of the Employee Retention Credit

Several tax credits for small business owners who were affected by the pandemic are available. The Employee Retention Credit is just one of the many that are out there. If you qualify for this tax credit, you should claim it.

Make sure to explore the rest of our blog to continue reading for more great articles.


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