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 might be unsure about what it is, who qualifies, and how to calculate it. Here’s what you need to know:

What is the Employee Retention Credit (ERC)?

The ERC is a tax credit designed to help businesses that kept employees on payroll during the COVID-19 pandemic.

  ▸  In 2020, eligible employers could claim 50% of qualified wages, up to $10,000 per employee per quarter.

  ▸  In 2021, the credit increased to 70% of qualified wages, up to $10,000 per employee per quarter.

  ▸  The credit was introduced in the CARES Act (2020) and later expanded in the Consolidated Appropriations Act (CAA) of 2021.

Who is Eligible for the ERC?

There are two ways to qualify for the Employee Retention Credit:

1. Your Business Was Fully or Partially Shut Down

If your business was mandated to fully or partially shut down due to government restrictions (e.g., reduced hours or capacity limits), you automatically qualify.

  ▸   Even if your business wasn’t directly affected, but your suppliers were, and you couldn't get the necessary goods or materials, you may still qualify.

2. Your Business Experienced a Significant Decline in Gross Receipts

• For 2020: Your business qualifies if you experienced a 50% or greater decline in gross receipts in Q2, Q3, or Q4 compared to the same quarter in 2019.

• For 2021: Your business qualifies if you experienced a 20% or greater decline in any quarter compared to the same quarter in 2019.

How to Calculate the ERC

Step 1: Determine Your Qualified Wages & Gross Receipts

• Qualified wages include wages + healthcare costs paid to employees during the eligible period.

• Gross receipts = Total revenue - Returns & Allowances

• Important: If you received a PPP loan, you must subtract those amounts from your qualified wages.

Formula:
Qualified Wages = (Wages paid - Any PPP loan or COVID-19 relief funds received)

Step 2: Calculate Your ERC

For 2020
ERC = 50% x Qualified Wages

For 2021
ERC = 70% x Qualified Wages

Example:
If your qualified wages for a quarter were $10,000, but you received $5,000 in PPP loans:

  ▸   2020 ERC = 50% x ($10,000 - $5,000) = $2,500
  ▸  2021 ERC = 70% x ($10,000 - $5,000) = $3,500

Maximize Your ERC with Arnold CPA

💰 Don’t miss out on this valuable financial relief for your small business!

At Arnold CPA, we help business owners:
  ▸  Determine ERC eligibility
  ▸  Accurately calculate your credit
  ▸  Navigate complex regulations to maximize your benefits

📞 Contact us today for expert guidance from a Houston CPA and secure the support your business needs to thrive!