What if not understanding the fine print ended up costing your business thousands of dollars?
Since the COVID-19 pandemic began, many businesses have benefited from the Employee Retention Credit. However, many aspects of the ERC are very confusing, including how the government defines terms such as “ERC qualified wages.”
In order to benefit from the ERC, it’s important to understand how everything works. Keep reading to discover answers to the questions that will help you master the ERC once and for all.
What Is the Employee Retention Credit?
We are going to answer all of your burning questions about things like qualified wages. Before we go any further, though, it’s important to define what the Employee Retention Credit is.
Simply put, the ERC is a special refundable credit that businesses can take advantage of. This credit can be claimed on qualified wages, which include particular health insurance costs that your business pays out to its employees.
The ERC program effectively ended with the signing of the Infrastructure Investment and Jobs Act. Thanks to this act, the ERC program retroactively ended on September 30, 2021.
Businesses can retroactively take advantage of the ERC. In fact, your own business has three years from the end of the program to get credit for qualifying wages that were paid to employees after March 12, 2020.
How To Qualify As An Eligible Employer
When businesses first discover the ERC, it often seems too good to be true. “What,” they ask, “is the catch?” In this case, the only catch is that you must qualify as an eligible employer in the eyes of the government.
Basically, there are two possible factors that determine whether your business qualifies for the credit. And one of these factors is particularly time-sensitive.
First, your business must have experienced a partial or full suspension of operations due to government orders. As you might imagine, you can only get the credit for the time your business experienced this suspension.
Now, there are some exceptions to this. For example, essential businesses were not allowed to suspend services and are therefore not eligible for the ERC based on the above factor. Similarly, businesses that were able to continue remotely even if the physical location was temporarily closed may not be eligible for the credit based on this factor.
As you can tell, the first factor is a bit restrictive. But there is a second factor that potentially includes all types of businesses. The factor in question is that your business must be able to show a significant decline in your overall gross receipts.
Basically, this extends the credit to any business that was significantly affected during the COVID-19 pandemic. And that may be good news to any business that has been suffering for the past couple of years.
The ERC and PPP
Obviously, the ERC is not the only government program intended to help businesses that were affected by COVID-19. The most famous of these programs was the Paycheck Protection Program (PPP). This program provided government loans to help struggling businesses, and certain businesses were able to qualify for PPP loan forgiveness.
However, that brings up an important question. If your business previously received PPP funds, then how does that impact your ability to take advantage of the ERC?
When the ERC first appeared, businesses that received PPP loans could not receive this tax credit. Later, though, businesses that received PPP were able to claim ERC.
How do the two interact? If you received PPP and had some of that loan amount forgiven, the IRS allows you to exclude the amount that was forgiven from the gross receipts you are reporting. Typically, though, a majority of your gross receipts will be the qualified wages that you paid out to your employees.
Qualified Wages and the ERC
This brings us to the big question: what are qualified wages, exactly?
Employee wages are normally very straightforward. These are wages that you pay to your employees. Depending on how your business is set up, things like healthcare costs may be included in these wages.
However, the ERC defines these wages differently because the tax credit is designed to help you with wages that you paid to employees who couldn’t work. Specifically, you can get credit for the wages that you paid to employees who couldn’t work due to either government orders or a significant decline in your company’s gross receipts.
ERC Qualified Wages: Changes From Year To Year
Another thing that makes the employee retention credit complex is that the rules are different from year to year. For example, for 2019 and 2020, if your business employed an average of more than 100 people, then you can only claim qualifying wages for employees that you retained but who were not able to work. And in 2021, if your business employed an average of 500 or more employees, you can only claim qualifying wages for employees that you retained but who were not able to work.
What if you run a much smaller business, then? For 2019 and 2020, if your business employed an average of fewer than 100 employees, you can claim the credit on all of them whether they were working or not. And for 2021, you can do the same thing if your business employed an average of fewer than 500 employees.
ERC qualified wages are an important part of the Employee Retention Credit (ERC) and serve as a great incentive for businesses to keep their employees on payroll during challenging economic times. ERC qualified wages consist of amounts that are paid or incurred by employers to their current employees in the form of cash wages, including salaries, hourly wages, vacation pay and other taxable wages. ERC qualified wages are limited to the first $10,000 of compensation paid to any employee during a calendar quarter and can be claimed for wages paid or incurred from March 13, 2020 through June 30, 2021. ERC qualified wages also include certain health plan expenses that are allocable to those wages. Employers should take care to understand the ERC qualified wages that qualify for ERC credits and plan accordingly to maximize their ERC benefits. By doing so, employers can take advantage of a valuable tax break while simultaneously incentivizing its staff to stay put during difficult times.
Get Your Credit Today
As you can tell, the employee retention credit can be more than a bit confusing. And things can get even more confusing once you start filling out all of the paperwork. But what if you had an expert who could guide you through the entire process?
Here at ERC today, we specialize in helping businesses just like your own take advantage of this tax credit. To see what we can do for you and your business, all you have to do is contact us today!