What to Expect From Your ERC Credit Calculation

erc credit calculation

Are you aware that the Employee Retention Credit (ERC) is not a loan?  ERC is a refund of your payroll taxes from the IRS. Surprisingly, more than 50% of small businesses are missing out on this program. Every company can receive a grant/refund of up to $26,000 per employee. Grab this opportunity before time runs out! Maybe you know about the credit but are nervous about making an accurate ERC credit calculation.

That is a legitimate concern. There have been three separate amendments to the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The CARES Act became law in March 2020. Changes made by the Relief Act of 2021, the American Rescue Plan Act, and the Infrastructure Investment and Jobs Act (IIJA) impact eligibility requirements, the size of qualifying businesses, the amount of credit available, and filing deadlines.

If your head is spinning and trying to determine eligibility makes you nervous, you are not alone. We will walk you through the process of determining your eligibility, calculating your ERC credit, and filing your claim.

After we walk you through the steps, we share the quick, easy alternative for getting a quick, accurate ERC calculation.

Determine Eligibility

Businesses may claim ERC credit for both 2020 and 2021. During the height of the COVID-19 pandemic, government restrictions on commerce, travel, group meetings, and more resulted in a partial or complete suspension of business operations. 

Any company undergoing a complete or partial suspension of standard business operation during those two years meets the qualification requirements for ERC credit.

The business does not have to be a for-profit company. Nonprofit organizations, hospitals, and colleges became eligible under the Relief Act of 2021.

There are allowances for businesses experiencing a significant decline in business receipts. The requirements for this qualification underwent changes between 2020 and 2021. Each year has different qualification requirements and benefit amounts.

Recovery Startup Business Eligibility

Recovery startup businesses may also qualify under the American Rescue Plan Act. Start-ups must have annual gross receipts under $1 million and not meet the other eligibility criteria. If your business opens on or after February 15, 2020, and you employ at least one person, you may qualify.

The Infrastructure Investment and Jobs Act allows start-ups to receive credit for wages they pay between October 1, 2021, to December 31, 2021. They must meet the definition of a startup according to IRS Code § 3134(c)(5).

Recovery startups are the only businesses that may request a refund for the last quarter of 2021.

Eligibility Rules 2020

For 2020 you must prove a decline in receipts of 50% or more for any or all quarters. You determine this by comparing receipts with those from the same quarter in 2019.  If you were not in business during 2019, additional comparison rules allow you to qualify for the refund.

Qualifying businesses may claim the credit against eligible employees’ wages paid between March 12, 2020, and January 1, 2021. You may claim 50% of the wages paid, up to a total of $10,000 of wages. The maximum refund is $5,000 per employee per quarter.

Even if the business did not experience a shutdown, full and partial closures have a trickle-down impact on many companies. The result is a reduction in gross receipts.

During 2020, employers showing a 50% or more decline in gross receipts in any quarter may claim ERC. To determine the reduction in receipts, compare the receipts with the same quarter during 2019.

Different rules apply to determine your qualifications if you were not operating as a business in 2019. You may want to consult with a specialist about how to claim for ERC.

Eligibility Rules 2021

For 2021, businesses only need to show a 20% decline in gross receipts in comparison with 2019 to qualify.

Different rules apply for determining qualification if you were not operating a business in 2019. You may consult an ERC specialist to determine eligibility.

The 2021 claim amount is up to 70% of eligible employees’ wages paid. The maximum per employee is $10,000 in wages per quarter. This gives you a maximum credit of $7,000 per employee per quarter.

Eligible businesses have the possibility of receiving a refund of $21,000 per employee if they claim all three quarters in 2021.

To determine a reduction in gross receipts, a comparison must be made with the same quarter in 2019. If you are a startup business that was not conducting business during 2019, different rules apply. You may want to contact an ERC specialist to determine eligibility.

Qualifying Wages

To qualify as a full-time employee, The IRS requires a minimum of 30 hours per week or 130 hours per month. The IRS also uses a look-back measurement.

In the look-back determination, the employee’s status as full-time is made by referring to a stable business period in the preceding quarter.

A business must prove continuation in paying a full-time workers’ compensation, including salary, health benefits, commissions, and more, during a time that the person is unable to work due to government shutdowns or a decline in business. Wages paid during that time qualify for ERC credit.

The majority of S Corp and C Corp businesses do not qualify. Determining eligibility requires carefully reviewing the shareholder shares, how each shareholder relates to the others, and more.

Self-employed, partnerships, sole proprietors, and LLC owners do not qualify. This is because the owner’s wages are not payroll. Their wages come from company profits.

If you are an owner that receives a standard paycheck, consult with an ERC specialist regarding qualifications. These businesses may qualify for a refund if they have employees meeting the eligible employee qualifications. 

If your employees are family members, their wages will not qualify for the credit. This includes the owner’s children, stepchildren, grandchildren, sisters and brothers, parents, aunts and uncles, and spouses.

You must be careful when completing your ERC calculations to ensure you do not claim ineligible wages. One of the critical factors in determining a qualifying wage is any compensation subject to FICA taxes, including health benefits and tips. Mistakes can result in penalties and fines.

Gather Documents

To determine and prove your eligibility for claiming ERC credit, you will need to upload the following documents:

  • Form 941—Employer Quarterly Federal Tax Return
  • Forms 7200—Advance Payment of Employer Credits Due to COVID-19 (if applicable)
  • Form 8655—Reporting Agent Authorization
  • Payroll Protection Program application (if applicable)
  • Payroll Protection Program forgiveness (if applicable)
  • COVID-19 grant forms for PPP, FFCRA §§ 7001 and 7003, and IRS Code §45S
  • 2019 Financials—quarters 1, 2, 3, and 4
  • 2020 Financials—quarters 1, 2, 3, and 4
  • 2021 Financials—quarter 1
  • Shutdown orders from local, state, or federal government (if applicable)

You must also sign a client service agreement before ERC Smart completes and files work on your behalf.

Business Size Impact on ERC

Businesses that may receive employee retention credit vary from less than 100 employees to more than 500 employees, dependent on other qualifying criteria.

Businesses with less than 100 employees can claim the 2020 credit for all working and non-working employee wages. This means if you have 50 employees receiving wages during 2020, some working, some not working, because of COVID-19, you can receive credit for all 50 employees.

Businesses with more than 100 employees in 2020 may claim wages paid to employees not working during that time period due to COVID-19. A change to eligibility changes in 2021 means employers can take credit for wages paid to working and non-working employees.

Businesses with less than 500 employees may only claim wages paid to non-working employees during 2021.

Businesses with more than 500 employees need to review the full-time status of all employees. If you employ a large number of people who do not meet the IRS full-time status, you may be eligible for an ERC refund.

Eligibility determinations use full-time employees only. Part-time employees do not enter into the employee count. 

Claiming Both Payroll Protection Plan (PPP) And Employee Retention Credit (ERC)

When ERC was first enacted, businesses could not claim employee retention credit if they were recipients of a Payroll Protection Program loan.

Changes to this restriction upon entry of the Consolidated Appropriations Act allow businesses to receive both PPP and ERC. When doing calculations, you must be sure that you do not use the same wages or payroll costs for both your PPP and ERC applications.

File Form 941-X

To claim your Employee Retention Credit for 2022 or 2021 retroactively, you must file an amendment to your quarterly taxes using form 941-X. You must mail amendments to the IRS. The IRS does not accept e-filing of this amendment.

If your business is in Puerto Rico, you must file for credit using Form 941-X(PR). You use this form to provide certifications and other information supporting period adjustments to Medicare and Social Security taxes. This form is in Spanish and is only for use in Puerto Rico.

The government allows a 3-year look-back. The deadline for submission of each 941-X is within three years of the original Form 941 filing.

Change in Tax Obligation

Claiming your ERC may result in additional income tax being owed. This is because the deduction for qualifying wages also reduces your income tax deduction by the same amount as the ERC qualifying wages. 

This takes place in the tax year when the wages were originally paid. You cannot claim the refund on your 2022 returns.

This means you may owe additional taxes for 2020 and 2021 if you file an ERC claim retroactively. Companies caught in the IRS refund backlog may be unable to pay additional taxes due before receiving their refund. This causes the company to incur penalties and fines.

Delay in Receiving Pandemic Relief Benefits

The Inspector General for Tax Administration’s Report No. 2022-46-059, issued August 31, 2022. The notice explains that processing delays are why many businesses are waiting for their pandemic relief benefits. This is partly due to a lack of programming updates, procedural guidance, and lack of prioritization.

The resulting delays are why the IRS did not begin to process Employee Retention Credits, Sick and Family Leave Credits, and Social Security Tax Deferrals until 12 months after the relief programs became active.

With the increase in tax return submissions and businesses needing to refile quarterly taxes using Form 941-X to claim their credit retroactively, the IRS backlog of 941-X processing was 447,435. 

The IRS took steps allowing companies to file for penalty relief. They realize a good portion of the problem is the IRS backlog in processing returns, especially Form 940-X. Becoming aware of the penalties and late fees businesses experience when caught in this scenario, IRS Notice IR-2022-89 from April 18, 2022, acknowledges the situation.

Penalty relief filings most likely cause further backlogs. This may be the reason for the August 2022 release of Notice 2022-36. The notice announces that the approximately 1.6 million companies that have paid penalties will receive a refund or credit.

A significant change is that the abatement of penalties is now automatic. You do not need to request relief. To receive the automatic penalty abatement, you must file your retroactive Employee Retention Credit claim by September 30, 2022.

This penalty relief also applies to information penalties for 2019 and 2020. The returns must have been filed before August 3, 2020, and August 2, 2021, to be eligible.

The information further states that because of the extraordinary COVID-19 event, this relief should not be considered a first-time abatement.

Simplify Your ERC Credit Calculation Process

The steps to claiming your ERC refund are simple. You can skip the majority of hair-pulling calculations by having ERC Smart handle the process for you.

First, a determination is made on your qualifications. You then upload your 941 returns, PPP loan documents, and payroll data into the ERC Smart system. ERC specialists will calculate the amount of credit you are eligible to receive.

ERC Smart will then assist you in filing amended 941-X returns. You then relax and wait for your refund to arrive in the mail.

Determine Eligibility in Five Minutes

Contact ERC Smart today if you want to see how much your company is eligible to receive. We can handle completing the ERC credit calculation for you in five minutes or less. Answer a few questions to receive our refund estimate.

Offering a reconciliation attribution between PPP and ERC, we ensure all calculations are accurate, evaluate your claim to maximize your credit, and work directly with your payroll company. We will validate and document your eligibility when you decide to have our company handle your ERC credit calculation. Your claim may be ready for filing within 1-2 weeks.

Do not hesitate to start your refund process today!