How To Calculate The Employee Retention Credit
webmanager • May 17th, 2023
Have you heard the phrase “Employee Retention Credit” thrown around?
Chances are you have! And for good reason.
The Employee Retention Credit could give your business thousands of dollars this year in the form of a refund from the IRS.
With this blog post, we’re going to explain what the Employee Retention Tax Credit (ERC) is, how to calculate it, and how to see if your business qualifies.
Let’s dive in!
First things first, it’s important to understand what the Employee Retention Credit (ERC) is.
The Employee Retention Credit is a refundable tax credit from the IRS based on wages you paid/will pay employees in 2020 and 2021. Essentially, it’s more stimulus funding for your business in the aftermath of COVID-19.
It was originally signed into law with the CARES Act in 2020, however, it has only recently become the powerhouse stimulus that it is today within the past few months.
Why?
Well, up until December 2020, business owners could not claim both PPP AND ERC – you had to choose one. And in most cases, it made more financial sense for business owners to opt for PPP at the time.
Fast forward to this year, and legislation has changed.
As of today, business owners are allowed to claim both PPP AND ERC, and additionally, you can now retroactively claim ERC all the way back to the beginning of 2020.
Sounds great, right? That’s because it is!
This means thousands of dollars may be up for grabs for your business.
And the best part is? You never have to pay back the Employee Retention Credit money you receive as you may have had to do with PPP.
The Employee Retention Credit (ERC) is not a loan – it’s yours to keep!
You’re probably wondering, “how much can I get back from the IRS with the Employee Retention Credit?!”
And the answer is: it depends.
The amount of money you’re eligible for depends on a few criteria.
To oversimplify the calculation, your business could be eligible for up to $5,000 per employee for 2020 and up to $28,000 per employee in 2021.
Let’s look at an example.
Let’s say you have five employees that you paid during 2020 and will continue to pay in 2021.
Let’s also assume that your business qualifies for the ERC for every quarter of 2020 and 2021.
This means your business could be eligible for $25,000 in the form of a refund for the year 2020, and $140,000 for 2021.
This is serious money up for grabs!
We’ve seen businesses receive up to $365,000 back from the Employee Retention Credit, and 2021 isn’t even over yet.
There are a few quick factors to take into account to see if your business qualifies.
For starters, your business must have at least 1 employee and you had to have started your business before February 2020. These are the non-negotiables.
If you tick both of these criteria, let’s move on to the additional qualifying factors.
In order to qualify for the Employee Retention Credit, your business must have:
OR
As an example, if your business earned $50,000 in 2019 Q1 and only $30,000 in 2021 Q1 – your business qualifies for that quarter, and subsequent quarters thereafter until revenue numbers returned to 2019 levels.
As another example, if your business didn’t experience reduced revenue due to COVID-19 (good for you!) however, you were forced to shut down your location for a period of time due to county, city, or state regulations, you also qualify!
Unfortunately, the calculations for the Employee Retention Credit (ERC) are quite complex, and not something that you can accurately do on your own without an accountant.
You’ll need to find an experienced accountant (if you don’t use us!) to complete the calculations and ERC application for you.
We won’t get into the complexities of the calculations in this post, but essentially, there are lengthy spreadsheets involved to determine which wages qualify and which wages are ineligible. Wages that were paid for by PPP funding are not eligible for the Employee Retention Credit (ERC) calculations, therefore businesses who took part in PPP will have more complicated calculations.
It’s important to make sure the Employee Retention Credit (ERC) calculations are done accurately to avoid audit risk by the IRS.
After your employee retention tax credit is calculated, your accountant will need to go back and amend every payroll tax filing from 2020 and 2021 so far, and resubmit them to the IRS.
If your credits exceed payroll taxes (they will!), you can request a direct refund from the IRS. This money will be mailed to you in the form of a check.
That’s right – you’ll receive cash back from the IRS!
Now, if it sounds like a lot of work to get the calculations complete and payroll taxes amended, that’s because it is!
But the benefits outweigh the time and effort by a long mile. Especially in a time when so many business owners are still hurting financially from the pandemic.
We strongly recommend asking your accountant to see if you qualify for the Employee Retention Credit, or booking a quick 15-minute call with us, to see if your business can receive tens of thousands of dollars back from the IRS.
It’s more than worth the few minutes of your time to find out.
To sum up the Employee Retention Credit (ERC), there are a few details to keep in mind.
Are you ready to see how much money your business could receive through the Employee Retention Credit? We’re here to help! Simply book a quick 15-min call with our team and we’ll help you get the process started. If you have a question we didn’t answer, you can get in touch with our team here any time.
Until next time!
Samy Basta brings you more than 20 years experience in tax, financial, and business consulting to his role as founder of Basta & Company. His focus is primarily strategic business planning, empowering clients to set priorities, focus energy and resources, and strengthen operations. In addition, Samy and his firm provide strategic counsel, and technical insight, on a wide range of needs, including tax saving strategies, tax return compliance, as well as choice of entity.
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