How to Calculate Employee Retention Credit for 2022

The Covid-19 pandemic was tough, especially for small businesses who suffered greatly having to comply with government restrictions that reduced business hours and, in some cases, meant that employees had to be let go to support the business’s future.

What is Employment Retention Credit?

To support businesses in financial distress, the government set up an Employee Retention Credit scheme which allowed the business to pay employees, even if they were unable to conduct their normal working hours.

Since the inception of the credit, there have been several amendments under the CARERS Act 2020 and Consolidation Appropriations Act 2021 and the American Rescue Plan Act 2021 which have expanded the funding and businesses covered in order to benefit more people, keep employees in work and keep businesses afloat.

The application process can be mind boggling, as you can imagine. Many businesses find the process to be very challenging and don’t have the time to go through the process. For this reason, many businesses are reaching out to specialist employee retention credit firms on a consultation basis to help them complete and maximize the credit they can receive.

How Does ERC Work?

The ERC is a refundable tax credit through payroll which is available for businesses to claim back if they paid out wages to employees between March 2020 and September 2021.

This credit could be as much as 50% of each employee’s wage from 2020 and a boosted 70% of each employee’s wage from March 2021.

How to Qualify for ERC

There are some specific criteria to benefit from the credit scheme from a business perspective. Although the scheme opened up to more and more business types as the pandemic progressed, there may still be some exclusions.

To qualify your business will:

• Need to display a lower gross profit than the years prior to the pandemic to demonstrate that their business has suffered as a result of the government restrictions. In certain situations, this may mean that businesses don’t qualify. For example, online businesses are likely to have suffered much less, meaning that their operations may have even seen an increase in profit during the pandemic.
• Businesses would also need to show that their operating hours were affected due to the pandemic, meaning that staff was forced to reduce their hours. This may not be the case for key workers including people within the healthcare or education sectors.

For those businesses that qualify, their employees who have suffered a significant loss of earnings throughout the pandemic period would qualify for some return. This includes a percentage of tips earned on service sector businesses if they are more than $20 per calendar month.

How to Calculate the Amount of ERC Due

If you’re unsure how much Employment Retention Credit your organization is due to claim, then it’s a good idea to speak to your accountant directly. They will be able to calculate efficiently based on your current situation.

Your Calculations

However, as an example of a small business with less than 500 employees, they would qualify if:

They earned $140,000 gross profit in 2018 and 2019 but dropped to $80,000 in 2020 and 2021. This shows a clear decrease in profit for the company due to factors beyond their control. If a company is making less than 80% of their normal profit due to the pandemic, they are likely to qualify.

For qualifying companies, each employee is eligible for a credit of up to 70% of their wage and up to $10,000 per quarter. This means that if someone was paid $9,000 per quarter, they would be entitled to $6,300, as this is 70% of their wage for that quarter.

Equally, if an employee is paid $15,000 for the quarter, their 70% would be $10,500. However, as the cap for the quarter is $10,000, they would receive the whole $10,000 and miss out on the extra $500.