As a business owner or manager, you understand the importance of keeping your employees happy and motivated. But did you know that there’s a tax credit specifically designed to help you achieve that goal? The employee retention tax credit (ERTC) is a valuable tool that can provide significant savings for businesses who retain their employees during tough economic times.
However, many businesses are unaware of this tax credit, or they leave money on the table by failing to properly calculate the amount they’re eligible for. That’s why we’ve put together this ultimate guide to ERTC calculation – so you can make sure you’re taking full advantage of this valuable tax credit.
What is the employee retention tax credit?
The ERTC was introduced as part of the CARES Act in response to the COVID-19 pandemic. This refundable tax credit is available to businesses who were impacted by the pandemic and were forced to reduce their operations or shut down completely due to government orders.
To qualify for the credit, businesses must meet one of two conditions:
1. They experienced a significant decline in gross receipts during the COVID-19 pandemic compared to the same period in the previous year.
2. They were forced to partially or fully suspend their operations due to government orders related to COVID-19.
If your business meets either of these conditions, you may be eligible for the ERTC. The credit is equal to 50% of qualifying wages paid to employees, up to a maximum of $10,000 per employee for all quarters in 2020 and $28,000 in 2021.
Calculating the ERTC
To calculate the ERTC, you’ll need to determine the amount of qualifying wages paid to your employees during the eligible period. Qualifying wages include:
1. Wages paid to employees who were working during the eligible period.
2. Health benefits paid on behalf of employees who were working during the eligible period.
3. Employer contributions to retirement plans on behalf of employees who were working during the eligible period.
To calculate the maximum credit amount, you’ll need to multiply the amount of qualifying wages paid to each employee by 50%, up to a maximum of $10,000 per employee in 2020 and $14,000 per employee in the first two quarters of 2021. For the second half of 2021, the maximum credit amount is increased to $28,000 per employee.
Example: If a business paid $20,000 in qualifying wages to an employee during the eligible period in 2021, the maximum credit amount would be $10,000 (50% of $20,000). If the business paid $30,000 in qualifying wages to the same employee during the same period, the maximum credit amount would still be $10,000, because the credit is capped at that amount per employee.
Make Sure You’re Not Leaving Money on the Table
To make sure you’re not leaving money on the table, it’s crucial to properly calculate the amount of qualifying wages paid to each employee during the eligible period. This can be a complex process, as you’ll need to consider factors like employee status, compensation structure, and payroll tax obligations.
Additionally, it’s important to keep accurate records of all eligible expenses, including wages, health benefits, and retirement plan contributions. This will help ensure that you’re able to claim the full amount of the credit you’re eligible for without encountering any issues during an IRS audit.
If you’re unsure about your eligibility for the ERTC or need help calculating the credit amount, it’s recommended to consult with a tax professional who has experience with this type of refundable tax credit. With the right guidance and support, you can maximize your ERTC savings and keep your employees happy and motivated for years to come.