business operations, payroll, financial planning, tax planning

Small Business Owners: What is the Employee Retention Credit (ERC) and How to Calculate It for 2020 and 2021

If you're a small business owner, you may have heard about the Employee Retention Credit (ERC), but you may need clarification on what it is, who is eligible, and how to calculate it. Here is more information:

What is the ERC?

The ERC is a tax credit that provides eligible employers with a credit against employment taxes equal to 50% in 2020 and 70% in 2021 of qualified wages, up to $10,000 per employee per quarter. The credit was introduced in the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020 and was later expanded in the Consolidated Appropriations Act (CAA) of 2021.

Who is eligible for the ERC? There are 2 ways you can qualify for the credit

1. Fully or partially shut down:

If your business was mandated to fully or partially shut down due to restrictions on hours or capacity, you automatically qualify for the ERC. Even if your business wasn't directly affected, but your suppliers were, and you couldn't get the critical goods or materials you needed, you may still qualify. We'll look at all the factors and circumstances related to your business and its suppliers to determine your eligibility for the credit.

2. Significant decline in gross receipts:

  • For 2020, small businesses that experienced a greater than 50% decline in gross receipts for the 2nd, 3rd, or 4th quarters compared with comparable quarters in 2019 were eligible for the ERC. 
  • For 2021, you were eligible for the ERC if your business experienced a decline in gross receipts of 20% or more in any quarter of  2021 compared to the same quarter in 2019

How to calculate the ERC?

1- Determine your qualified wages and gross receipts. Qualified wages include wages and healthcare costs paid to employees during the eligible period. Gross receipts are your total revenue minus returns and allowances. You can use the following formula:

Qualified wages = Wages paid to employees during the eligible period - any amounts received through PPP loans or other COVID-19 relief programs

2- Calculate your ERC 

2020 ERC = 50% x Qualified wages - any amounts received through PPP loans or other COVID-19 relief programs 

2021 ERC = 70% x Qualified wages - any amounts received through PPP loans or other COVID-19 relief programs

For example, if your qualified wages for a quarter are $10,000 and you received $5,000 in PPP loans, your ERC would be:

  • For 2020: ERC = 50% x ($10,000 - $5,000) = $2,500
  • For 2021: ERC = 70% x ($10,000 - $5,000) = $3,500    
Don't miss out on the valuable financial relief that the Employee Retention Credit (ERC) can provide your small business! Consult with Arnold CPA today to understand the rules and regulations surrounding the credit, determine your eligibility, and calculate it correctly. Our team can help you navigate the complex requirements and take full advantage of the credit to optimize your financial planning. Contact us now to get started and secure the support your business needs to thrive in these challenging times.

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