In a previous article, we discussed how to determine if a company is eligible for the ERC (See article “What Businesses Are Eligible for the ERC Credit”). In this article, We are going to go over how to calculate the Employment Retention Credit (ERC).
Overview of the credit calculation:
- Employee Retention Credit 2020, a company can claim a credit equal to 50% of the qualified wages and qualified health plan expenses paid to each employee. This maxes out at $10,000 per employee, so the max credit for the year is $5,000 per employee.
- Employee Retention Credit 2021, a company can claim a credit equal to 70% of qualified wages and qualified health plan expenses paid to each employee. This maxes out at $10,000 per employee, so the max credit per quarter is $7,000 per employee.
As noted above, the Employee Retention Credit 2020 allows for 50% of qualified wages, and the Employee Retention Credit 2021 allows for 70% of qualified wages to be claimed as a refundable credit. Qualified wages are those wages paid to employees (including allowed healthcare costs) in the period operations were suspended or the period of decline in gross receipts. This is discussed in detail in another article.
To calculate qualified wages, a company would take the wages for the eligible quarter and would exclude the following:
- Wages for individuals who are related to the business owner or owners. A spouse is allowed but any immediate family members, including children, grandchildren, aunts, uncles, nieces and nephews, are disallowed.
- Wages that were used for PPP Loan(s) Forgiveness.
- Wages that were used to receive a certain grant(s).
- Wages that were used for COVID-19 related tax credits.
- Any wages above $10,000 for any employee.
The limitation on wages used for PPP loan forgiveness is by far the most important factor that companies need to be aware of. This is a huge planning opportunity! See the article “How the ERC and the PPP Work Together.”
Qualified Health Care Expenses
Qualified healthcare expenses are amounts paid or incurred by the eligible employer to provide and maintain a group health plan, but only to the extent that such amounts are excluded from the gross income of the employees.
The best way to determine qualified healthcare expenses is to look at the specific examples listed in IRS Notice 2021-20 under section “H. Allocable Qualified Health Plan Expense”. Two examples that will apply to most companies are found in Question/Answer 40 and 43:
“Question 40: Do qualified health plan expenses include both the portion of the cost paid by the eligible employer and the portion of the cost paid by the employee?”
“Answer 40: Yes. However, amounts that the employee paid for with after-tax contributions are not considered qualified health plan expenses. The amount of qualified health plan expenses taken into account in determining the amount of qualified wages generally includes both the portion of the cost paid by the eligible employer and the portion of the cost paid by the employee with pre-tax salary reduction contributions.”
“Question 43: For an eligible employer that sponsors more than one plan for its employees (for example, both a group health plan and a health flexible spending arrangement (health FSA)), or more than one plan covering different employees, how are the qualified health plan expenses for each employee determined?”
“Answer 43: The qualified health plan expenses are determined separately for each plan. For each plan, those expenses are allocated to the employees who participate in that plan. In the case of an employee who participates in more than one plan, the allocated expenses of each plan in which the employee participates are aggregated for that employee.”
Now that you have read how to calculate the ERC, I recommend you read the article “How to Claim the ERC Credit.”