employee retention is a significant concern for businesses today. Companies invest a significant amount of time and resources in recruiting and training employees. Therefore, retaining employees is crucial for businesses to maintain continuity, productivity, and profitability. The COVID-19 pandemic has enhanced the struggle of retaining employees as the economic downturn affects employment opportunities and employee confidence. However, businesses can take advantage of the employee retention tax credit (ERTC) to retain employees and help their businesses thrive.
The ERTC is an opportunity for businesses to save money on employment tax expenditures while retaining employees. The credit applies to businesses that experienced a decline in revenue due to COVID-19 or were forced to close. Employers that retain their employees during the COVID-19 crisis are eligible to receive a credit of up to $5,000 per employee for the year.
Calculation of ERTC
The ERTC calculation in 2020 was 50% of the qualifying wages paid to each employee. Qualifying wages include all employee wages paid between March 13, 2020, and December 31, 2020. The maximum credit value is $5,000 per employee. Therefore, the maximum credit value per employee is $5,000, representing 50% of $10,000 (the maximum qualifying wages per employee).
In 2021, the ERTC value is increased to 70% of the qualifying wages paid to each employee. The maximum credit value per employee is $28,000, representing 70% of $40,000 (the maximum qualifying wages per employee).
The calculation of ERTC follows a few steps:
Step 1: Determine Eligibility
Businesses should first determine if they are eligible for the ERTC. In 2020, businesses that experienced a 50% reduction in gross receipts compared to the same quarter in 2019 or were forced to close due to a government order were eligible for the ERTC. However, since the onset of the pandemic, the criteria for eligibility have evolved. In 2021, businesses are eligible for the ERTC if they experienced a 20% reduction in gross receipts compared to the same quarter in 2019.
Step 2: Eligibility Period
The eligibility period is calculated based on the calendar quarter of eligibility that qualifies the business for the ERTC. Businesses are eligible for the ERTC for the entire quarter, including subsequent quarters until gross receipts surpass pre-pandemic levels.
Step 3: Calculate Qualifying Wages
Qualifying wages are calculated based on the wages paid during the eligibility period. In 2020, businesses with 100 or fewer employees could claim the credit even on wages paid to employees who were not working. This provision is removed in 2021, and businesses can only credit wages paid for hours employees work during the eligibility period.
Step 4: Calculate the credit
The ERTC credit is calculated based on the percentage of qualifying wages paid to employees during the eligibility period. In 2020, the credit value was 50% of qualifying wages, for a maximum credit value of $5,000 per employee. In 2021, the credit value is increased to 70% of qualifying wages, with a maximum credit value per employee of $28,000.
The Bottom Line
The employee retention tax credit is a helpful tool for businesses to retain their employees, particularly during the COVID-19 pandemic. The credit can have an immense impact on businesses’ financial stability while providing incentives for employers to retain their employees. Understanding how to calculate the ERTC is crucial, particularly for small businesses affected by the pandemic’s economic downturn. Utilizing the ERTC can enable businesses to thrive while retaining employees, enhancing productivity and profitability.