As businesses continue to navigate the challenges brought on by the COVID-19 pandemic, many are turning to various government programs and tax credits to help provide financial relief. One such credit that has gained attention is the employee retention credit (ERC). The ERC is a refundable tax credit that is designed to help businesses keep employees on their payroll during the pandemic.
Calculating the ERC amount can be a complex process, but with the right guidance and understanding of the steps involved, businesses can take advantage of this valuable credit. Below is a step-by-step guide to help businesses calculate their ERC amount:
Step 1: Determine Eligibility
The first step in calculating the ERC amount is to determine if your business is eligible for the credit. To be eligible, the business must have experienced either a full or partial suspension of operations due to a government order related to COVID-19, or have had a significant decline in gross receipts. The business must also have had an average of 500 or fewer full-time employees in 2019.
Step 2: Calculate Qualified Wages
Once eligibility has been determined, the next step is to calculate the amount of qualified wages that can be used to calculate the ERC. Qualified wages are wages paid to employees during the eligible period. For businesses with 100 or fewer employees, all wages paid to employees during the eligible period are considered qualified wages. For businesses with more than 100 employees, only wages paid to employees who are not providing services due to a suspension of operations or a decline in gross receipts are considered qualified wages.
Step 3: Determine the ERC Amount
The ERC amount is equal to 50% of qualified wages paid to employees, up to a maximum of $10,000 per employee for all quarters combined. This means that the maximum credit per employee is $5,000.
Step 4: Offset Payroll Taxes
Once the ERC amount has been determined, businesses can then offset any payroll taxes that they owe by the amount of the ERC. Any excess credit can be refunded to the business.
Step 5: Keep Detailed Records
It is important for businesses to keep detailed records of the calculations and documentation used to support the ERC amount claimed. This will be important in the event of an IRS audit or review.
In conclusion, calculating the ERC amount can be a complex process, but with the proper understanding of the eligibility criteria and the steps involved, businesses can take advantage of this valuable credit. By following the steps outlined above, businesses can determine their ERC amount and receive much-needed financial relief during these challenging times.