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Employee Retention Credit Calculation Guide

By Justine D.

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The past few years have been hard for nearly everybody, but small businesses have been impacted significantly more than others. The pandemic and the government’s response to contain it have been costly to both employees and their employers.

Do you know how you can help your small business with instant financial relief thanks to the Employee Retention Credit?

If you’re a small business owner having difficulty balancing your budget due to the pandemic, then the ERC tax credit might be simpler to use than other relief choices, such as government grants and loans.

Do you know how these tax credits work? If not, then keep reading to learn about what’s available. Even if you do, it’s worth reading about calculating your potential ERC savings.


Congress started the Employee Retention Credit as a means of helping companies that were hurt by either the pandemic itself or the restrictions placed on many economic activities as a result. The big idea behind this was to help businesses reduce the rate of employee dismissals so that jobs would be saved.

This program has been very successful in helping employers keep employees with their businesses even if their establishments were suffering with cash flow issues. This was introduced as part of the COVID CARES act.

It initially permitted tax credits as high as 50A% for each qualified employee. Their wages had to fall from March 12, 2020, to ending December 31 of the same year. Eligible employers couldn’t recieve more than $10,000 in credits for that year.

On the other hand, government authorities later boosted the percentage to up to 70% for the first three quarters of 2021. Also, the $10,000 cap switched from yearly to quarterly. Any business that has qualified wages can apply for this program.

The ERC is open to any business, of any size, industry, or annual employee turnover rate. You should know that companies will face different rules if their total headcount is under 100 or 500 employees.

How is ERC Calculated?


How to calculate ERC credit is a process that can be both simple and complex. However, it’s easier when you understand how to handle the minutiae of the calculations.

A business can claim credits for two years, namely 2020 & 2021. The credit for 2020 credit went up to 50% for eligible employees between March 12 and December 31st of that year. Employers could claim up to $10,000 worth of wages for credits for this period.

For the ERC 2021 calculation, ERC cap increased to 70% for qualified employers, and the period lasted the entire calendar year of January 1 through December 31. The max credit of $10,000 was switched to quarterly instead of annual so that employers could claim credits up to $28,000.

1. Qualifications for 2021

Employers might get refundable tax credits through the ERC to offset the expenses of keeping their employees through the pandemic. To get ERC benefits, your business has to qualify as an employer who is eligible. Any business listed in IRC Section 52 or 414(m) can become eligible. The criteria for eligibility in 2020 is slightly different than 2021.

2. Qualifications for 2020

During the pandemic, government restrictions impacted group meetings, travel, commerce, and other economic activities. As a result, many businesses went through a serious decline or had to suspend their operations. Employers impacted by any of this might be eligible for ERC benefits.

If your business had its gross receipts decline by half during any 2020 quarter compared to similar 2019 quarters, it might be eligible for ERC benefits for that quarter and the next one. As an employer, you might also have eligibility for each three month quarter in 2020, except for quarters where gross receipts were 80% or more compared to identical 2019 quarters.

2021 Eligibility Rules


The 2021 eligibility criteria are very close to what they were for 2020, but they are not identical. A business is eligible if it underwent economic hardship in a qualifying quarter because of the pandemic or government restrictions that limited its economic activity. Also, eligibility can happen if your gross receipts in the quarter were reduced by 80% or more compared to a similar 2019 quarter.

While ERC benefits help many businesses, they can also give employees a hand in meeting healthcare expenses, educational obligations, and other daily necessities. When businesses see their activity decline, many minimize expenses by reducing employee wages and benefits. In this case, the government was looking out for everyone by helping employers recover and keep their staff employed.

Employers are eligible to claim ERC losses and get monetary relief just like before. The pay and compensation for full-time employees are called qualified wages. If your business paid these out even when operations were impacted negatively, your company is eligible for ERC benefits. Those can even cover employer health plan expenses when deducted appropriately from wages or salary. That means employees can receive up to $7,0000 each quarter for $28,000 for 2021.

How Do ERC Credit Calculations Work?


Small businesses in the private sector suffered mightily during the pandemic and through the restrictions placed on economic activities. The ERC enables employers to get 70% credits up to $10,000 for each employee’s qualifying wages every quarter. That makes the maximum quarterly credit $7,000, and the yearly credit for 2021 is $28,000. This credit means that an employer’s Social Security tax burden is reduced.

The calculation of Employee Retention Credit is also called the ERCC, and it’s a very powerful tax measure that helps both smaller and medium sized businesses. Even tax-exempt establishments can use it to deal with pandemic-related economic effects.

The ERC offers businesses refundable tax relief for the initial three quarters in 2021, which can be as much as $7,000 each quarter per employee. Reduced benefits are available for the year of 2020.

How to Claim Benefits


Based on the conditions of the ERC legislation, your business has two different choices. First, you can claim the tax credit for a period that has already happened in the past. Secondly, you can get payments in advance. You should note that an employer with over 500 employees can’t get advance payments.

Put in a request for the refund by using Form 7200 if it still applies. Start the ERC calculation by computing your eligible wages and salaries before deducting quarterly deposits related to costs of health insurance.

You might need to use Form 941X based on when you file. The original Form 7200 is no longer in regular use by the IRS. A qualified tax professional can help you navigate all the paperwork.

What Impact Does the ERC Have on Other Provisions for Tax Credits and Economic Relief


Assume your company has eligible employer status and can claim ERC credits. This will impact other relief and credit provisions you might take advantage of. You can’t claim both the ERC and the PPP. You’ll immediately lose access to the other option if you choose the ERC benefits.

If you are eligible as an employer for an Internal Revenue Code Section 51 Tax Credit for Work Opportunity, you can’t include the employee. Also, Section 45S doesn’t let wages be considered for paid medical and family leave credits if you already claimed them under the ERC. A qualified employer that gets a sick leave or family leave tax credit through the initial Coronavirus Response Act can’t incorporate said credit in the wages category.

In an ERC Calculation, What Does a “Significant Decline in Gross Receipts” Mean?


The terms and conditions of the ERC are very clear. The government stipulated everything that matters, but the provision about a significant decline in gross receipts is particularly important. It also confuses many employers as to what it means.

In short, it’s when a business its gross revenues drop severely. The usual measuring stick is comparing the first 2020 quarter to the previous quarter and seeing a drop of over 50%.

Many small businesses saw a considerable drop in the first quarter of 2020 compared to the same quarter of 2019 or 2021. This is when the pandemic hit America hard, and lockdown restrictions started.

What’s the Maximum Credit for Each Employee?


The qualified wages determine ERC calculations, which include health policy expenses employers pay to their employees. The ERC equates to 50% of all qualified wages in the applicable 2020 time periods, but they went up to 70% for any periods that apply for 2021. For 2021, the cap is $10,000 per employee for each quarter.

The pandemic hit everyone hard, and the ERC is just one way to fortify your businesses strength. On top of this option, you can look at other potential relief measures. Specific examples include the Paycheck Protection Program or the loan for Economic Injury Disaster. 
 

Be sure you maintain records of all your capital expenditures, payroll documents, and taxes to get the right credit. The modern economy is a roller coaster ride, but tracking every penny helps you get the most out of your federal returns. Keeping as much money as possible makes or breaks your business, so don’t wait to consult a professional for help with all of this.

Every employee might net you as much as $5,000 – $10,000 in credits for every calendar quarter once everything is factored in. Never leave money on the table.

Key Takeaways


Trying to do ERC calculations can get confusing. Fortunately, you only need a thorough understanding of the calculations. Once that happens, you can handle your business’s ERC calculations and make any claims related to how the pandemic impacted your company.

The one thing you should do when handling ERC credit calculations is consult a professional expert who can make sure your calculations are accurate and free of errors.

Get Assistance from a Trustworthy Firm


If you yet to file for ERC, you should consider doing it sooner rather than later. The deadline for for 2020 filing is April of 2024, and April of 2025 for the 2021 tax year. You need an experienced, professional, and trusted provider with a provable track record in application filing and actual receipt of credits for their clients.

Our team has spent hundreds of hours researching and reviewing providers to find the best of the best. ERC Specialists secures the #1 spot because they have successfully processed and received the most legit refunds and have excellent customer reviews. Omega Accounting Solutions comes in at a very close #2 because of their customer service and legitimacy. ERC Today comes in at #3.


We are confident in these recommendations but always remember to do your research on a company if you consider hiring them. Below is a summary of each company.

4.6/5

4.3 of 5 stars

The company specializes in ERC tax refunds and has long experience obtaining the maximum amounts for clients. The team at ERC Specialists has a deep understanding of the ERC program’s workings as well as the field of payroll taxation. Their application is fast and simple, and it removes the guessing factor from applying for ERC tax refunds. 

Pros

  • The application process is simple and fast
  • You get no-cost analysis to see whether you will qualify
  • There are substantial discounts for upfront fee payment

Cons

  • It can take a while to get help via telephone

Note: ERC specialists uses a back office partner firm called LINQQS. When you click the link to start an ERC evaluation, you will see a LINQQS qualification form.

4.3/5

4.3 of 5 stars

Omega Accounting Solutions is the best ERC company on the list. They offer bridge loans, which make up for their potentially year-long processing time for customer refunds. They’ve already helped more than 2,000 clients and have excellent reviews online

Pros

  • File and prepare all amended tax documents
  • Application is fully secure and simple
  • There are ERC bridge loans that provide instant cash flow

Cons

  • Their client fees are not available on the website
4.1/5

4.1 of 5 stars

Besides offering their customers a fast and simple way to claim ERC tax money, ERC Today’s team charges no fees to find out if you qualify for a refund in the first place. They work fast to get your paperwork to the IRS. The client portal is safe to use, and there is dedicated customer support available. Those are just some of the reasons this company receives uniformly high marks from its many clients.

Pros

  • Customer support includes dedicated reps for each customer
  • The application process is totally streamlined
  • You can get a no-cost analysis to find out whether you qualify

Cons

  • Pricing is not transparent

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