employee retention tax credit (ERTC) is a refundable tax credit that was introduced under the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide financial support to businesses affected by the COVID-19 pandemic. The ERTC is aimed at encouraging employers to keep their employees on payroll by offsetting their payroll taxes. In this article, we will explore the ABCs of ERTC calculation.
A- Eligibility for ERTC
Before diving into the calculation of the ERTC, it is essential to determine if your business is eligible to claim the credit. To qualify for the credit, the business must meet the following criteria:
1. The business must have been fully or partially suspended due to a government order relating to COVID-19, or
2. The business must have experienced a significant decline in gross receipts.
The significant decline in gross receipts is determined by comparing the current quarter’s gross receipts with the corresponding quarter of the previous year. If the gross receipts have decreased by 50% or more, the employer is eligible to claim the credit, and if the gross receipts have decreased by less than 50%, the employer can claim the credit for the quarter in which they have been affected.
B- Calculation of ERTC
The ERTC amount can be up to 70% of the qualified wages paid to an employee, up to $10,000 per employee per quarter. The qualified wages include:
1. Wages paid to employees during the period of suspension or reduced operations, or
2. Wages paid to employees during the significant decline in gross receipts period.
The qualified wages vary depending on the size of the business. For businesses with an average of 100 or fewer employees during 2019, all wages paid to employees during the period of eligibility are eligible for the credit. For businesses with an average of more than 100 employees during 2019, only wages paid to employees who are not providing services due to the suspension or significant decline in gross receipts are eligible.
C- Claiming ERTC
To claim the ERTC, a business must report the information on their quarterly employment tax returns (Form 941). If the credit amount is greater than the employer’s portion of the Social Security tax and any federal employee retention credits, the excess amount will be refunded to the employer.
In conclusion, the ERTC is a valuable financial relief for businesses that have been affected by the COVID-19 pandemic. The calculation of the credit amount depends on the eligibility and qualified wages, and it is important to correctly report the information on the employment tax returns. By understanding the ABCs of ERTC calculation, businesses can take advantage of this credit and better navigate their way through the pandemic.