How to Calculate Employees for the Employee Retention Credit

The Employee Retention Credit (ERC) was created to reward eligible employers for retaining their employees during specific periods of the pandemic. The ERC calculation is based on total qualified salaries, including health plan expenses paid by the employer to the employee. Payments, including severance payments, made to a former employee after the termination of the employment relationship are not considered qualifying wages for the purpose of the credit. It is not reasonable for an employer to consider that an employee's working hours have been reduced based on an evaluation of the employee's productivity levels during the hours they work.

For employees who are not providing services due to the closure of their branch office, but who receive 50 percent of their normal hourly wage, employers may treat the wages paid as qualifying wages for the purposes of the ERC. The amounts paid to authorized real estate agents of real estate brokerage firms do not constitute wages within the meaning of section 3121 (a) of the Code and, therefore, are not qualified salaries for the purposes of the ERC. The minister's salary and stewardship allowance do not constitute salaries within the meaning of section 3121 (a) of the Code and, therefore, are not qualified salaries for the purposes of the ERC. Eligible employers are entitled to an employee retention credit based on the qualified wages paid to their employees.

Qualified wages are calculated without regard to federal taxes imposed or withheld, including the employee or employer's share of social security taxes, the employee and employer's share of Medicare taxes, and the federal income taxes that must be withheld. Because employees' working hours have not changed, none of the wages that Employer W pays employees is qualifying wages. It should be very clear at this point that, ultimately, the number of employees is determined by the number of “full-time employees”.For more information on determining maximum amounts for eligible employers' employee retention credits, please refer to relevant IRS guidelines.