Calculating qualified wages for the Employee Retention Credit (ERC) can be complex, but it’s essential for businesses to understand the criteria and properly assess qualified wages.

Jun 7, 2023 | Affiliates

We will discuss qualified wages for ERC in this article.

Here’s what you need to know:

  1. Qualified Wages for 2020: Under the CARES Act, the initial ERC was available from March 13, 2020, to December 31, 2021. Qualified wages include wages and compensation paid by an Eligible Employer to employees along with qualified health plan expenses properly allocated to those wages. They cannot reimburse you through another tax provision. Qualified wages also include certain group insurance premiums and qualified production activities payments. In 2020, eligible employers can claim up to $10,000 per employee for the year. This is resulting in a maximum credit of $5,000 per employee.
  2. Second is Qualified Wages for 2021: The ERC was extended and expanded in subsequent pandemic legislation. For most businesses, it ended on September 30, 2021, except for recovery startup businesses that qualify until December 31, 2021. In 2021, eligible employers can claim up to $10,000 per employee per quarter. This is resulting in a maximum credit of $7,000 per employee per quarter or $21,000 per employee per year.

To qualify for the ERC, employers must have experienced a significant reduction in gross receipts or have been fully or partially closed due to a government order. The reduction in gross receipts should be more than 50% in 2020 and 20% in 2021 compared to the corresponding quarter in 2019.

Calculating qualified wages and claiming the ERC involves several steps:

  1. Add Up Qualified Wages: Combine all qualified wages and health plan expenses for all employees during qualifying quarters. Note that large employers can only include wages paid to employees not providing services due to economic hardship.
  2. Avoid Overlapping Wages: Exclude wages included in other relief programs like the Paycheck Protection Program (PPP). You can still claim the ERC if you received a PPP loan, but not for the same wages covered by the PPP funds.
  3. Calculate the ERC: Calculate the credit amount based on the applicable percentage (50% for 2020 and 70% for 2021) of qualified wages per employee.
  4. File Form 941-X: If you didn’t claim the ERC on your original tax returns, you can still amend them. Use Form 941-X to claim the ERC retroactively. The deadline for filing depends on the date of the initial tax return or when you pay the tax.
  5. Ensure Accuracy: Double-check all calculations and records to avoid errors and potential penalties.

Remember, the ERC has been extended until December 31, 2023, offering eligible employers a refundable tax credit of up to 70% of qualified wages paid during that period. Stay updated on the latest facts and consult experts to maximize the benefits of the ERC for your business. Contact ERC Specialists today for assistance and to discuss your eligibility and qualified wages for the ERC.

Frequently Asked Question

Do I have to repay the ERC Credit?

No, you do not have to repay the Employee Retention Credit (ERC). The ERC is a refundable tax credit, not a loan. When you file your ERC claim, the credit is applied against your tax liability, and if there is any remaining credit, you will receive it as a refund check. So, you do not need to repay the ERC credit received.

My revenue increased in 2020. Can I still be eligible for the ERC program? 

Yes, you can still qualify for the Employee Retention Credit (ERC) program in 2020, even if your revenue increases. In addition to revenue reduction, another qualification criterion is a full or partial shutdown of your business due to COVID-19. The IRS defines this as a government-mandated closure or limitations on operations, travel restrictions, or restrictions on group gatherings that affected your business.

Here are some examples that illustrate eligibility for the ERC:

  • A restaurant has a requirement to close or limit its on-site dining, such as operating at reduced capacity due to COVID-19 restrictions.
  • A business relies on in-person client meetings but has to cancel or postpone them due to COVID-19 restrictions.
  • A business was instructed to reduce operating hours because of COVID-19 restrictions and increased cleaning requirements.
  • A business experiences delays in production timelines caused by disruptions in the supply chain due to the pandemic.
  • A business plans an event but has to cancel it or restrict attendance due to COVID-19 restrictions on large gatherings.

As an owner are my wages or the wages of any family member I employ, eligible? 

The eligibility of wages for owners and family members in the Employee Retention Credit (ERC) program depends on certain factors. If an owner holds a majority ownership stake, defined as over 50%, their wages are not eligible for the ERC. Additionally, the W-2 wages of immediate family members of the owner are also not eligible.

However, if an owner has less than 50% ownership, their W-2 wages can be considered eligible for the ERC. Similarly, the W-2 wages paid to immediate family members of the owner can also be eligible for the credit.

These examples demonstrate situations where a business may be eligible for the ERC, even if its revenue increases. It’s important to carefully evaluate your circumstances and consult a qualified tax professional to determine your eligibility for the ERC program.

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