Key Takeaways:
- Qualified wages in 2020: Up to 50% of $10,000 in employee wages and health plan costs, totaling $5,000 per employee per year.
- Qualified wages in 2021: Up to 70% of $10,000 in employee wages and health plan costs per quarter, totaling $21,000 per employee per year.
- The ERC ended for most businesses on September 30, 2021, but recovery startup businesses are eligible until the end of 2021.
- Eligible employers must have had a quarter in 2020 or 2021 when they experienced the following:
- Saw a loss in gross receipts of 50% in 2020 or 20% in 2021, OR
- Had to close fully or partially because of a government order
- The definition of a “large employer” was an employer with more than 100 full-time employees in 2020 and more than 500 full-time employees in 2021.
- Large employers cannot claim all employee wages for the ERC, only those wages paid to employees who were not providing services.
- Five steps to calculate qualified wages and claim the ERC:
- Add up qualified wages
- Make sure wages don’t overlap
- Calculate the ERC
- File Form 941-X by the deadline
- Ensure all your numbers are accurate
- Both part-time and full-time employee wages can be included.
- You have three years from the date you filed the tax return to retroactively claim the credit or two years from when you paid the tax, whichever is later.
Most pandemic restrictions and shutdowns are behind us, we hope, but many businesses are still feeling the impacts of shutdowns and losses in the early part of 2023. One recent study of over 5,000 small businesses found that, on average, companies still only have enough cash on hand for a couple of weeks.
You may be eligible for the employee retention credit (ERC) as a small business owner. This credit was designed, in 2020, to help businesses keep their employees on the payroll during the COVID-19 pandemic.
You must have experienced a decline in revenue of at least 50% in 2020 compared to the same quarter in 2019 to qualify, or 20% in 2021 compared to the same quarter in 2019. Wages paid to employees and their health plan costs can be counted towards the credit.
But what are qualified wages for the employee retention credit? This guide will take a closer look at what qualifies for both 2020 and 2021, since the two years differ.
What Are Qualified Wages for the Employee Retention Credit in 2020?
Determining qualified wages for the employee retention credit can be tricky. Businesses must understand the criteria that must be met to receive the credit and properly assess qualified wages.
The ERC was first introduced in the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. The initial ERC lasted from March 13, 2020, to December 31, 2021, so businesses could claim the credit for any qualifying quarters during that time. Qualified wages were paid to employees during this period.
The IRS defines qualified wages as wages and compensation “paid by an Eligible Employer to some or all of its employees” and include “qualified health plan expenses that are properly allocable to the wages.”
Qualified wages or expenses cannot be reimbursed through another tax provision – this is known as double dipping. Qualified wages also include qualified group insurance premiums and certain qualified production activities payments.
For 2020, eligible employers can claim up to $10,000 per employee for the year, so at 50%, the maximum possible credit is $5,000 per employee for all of 2020.
What Are Qualified Wages for the ERC in 2021?
Further pandemic legislation after the CARES Act extended and expanded the ERC. The credit then continued into 2021 and increased to 70% of qualified wages. The ERC ended for most businesses on September 30, 2021. However, if your business started operations after February 15, 2020, has less than $1 million in annual gross receipts and has one or more employees, you can qualify for the ERC until December 31, 2021, adding the last quarter. These businesses are known as recovery startup businesses.
For 2021, eligible employers can claim up to $10,000 per employee for each quarter, so at 70%, the maximum possible credit is $7,000 per employee per quarter, or $21,000 per employee per year. As you can see, the credit was increased significantly for 2021 compared to 2020 limits.
The ERC is a significant credit for 2020 and 2021, so you don’t want to miss the opportunity to take it. Consult a qualified tax professional when assessing qualified wages to ensure you always stay compliant with the latest tax laws and regulations.
Who Qualifies for the Employee Retention Credit
Now, let’s discuss how employers can qualify for the ERC. The ERC is available to certain employers that have experienced a significant reduction in gross receipts due to the pandemic. Generally, employers must experience a year-over-year gross receipt reduction of more than 50% in 2020 and 20% in 2021. Employers compare the given quarter in 2020 or 2021 to the same quarter in 2019 to determine the loss.
The other way to qualify is to determine whether your business had to close, either fully or partially, because of a government order in any qualifying quarter of 2020 or 2021. These quarters would qualify with or without the loss in gross receipts.
Different criteria apply depending on the size of the employer. “Large employers” can only claim the ERC for wages of employees who were not providing services. The two years differ on that definition, however, as follows:
Large Employers in 2020
The CARES Act stipulated that a large employer was any employer with more than 100 full-time employees.
Large Employers in 2021
In 2021, large employers were those with more than 500 full-time employees.
Employers can use the employee retention credit to offset their Social Security tax liability up to certain limits, providing valuable financial relief during challenging times of the pandemic. Companies that qualify for the ERC should claim the credit before it’s too late. Talk about your options with a tax expert who understands all requirements.
5 Steps to Calculate Qualified Wages and Claim the ERC
Calculating the ERC all starts with determining qualifying wages and quarters. These steps will help you ensure you’re doing everything correctly when you apply for the ERC:
1. Add Up Qualified Wages
You first need to combine all qualified wages and health plan expenses for all your employees during qualifying quarters. Remember that during these periods, you had to have a loss in gross receipts, or your business was closed. Large employers can only include wages paid to workers when they weren’t providing services because of economic hardship.
2. Make Sure Wages Don’t Overlap
Don’t include wages that are included in other relief programs, like the Paycheck Protection Program (PPP). You can still claim the ERC if you received a PPP loan, but you cannot claim the same wages that PPP loan funds paid for.
3. Calculate the ERC
Next, do the math to come up with your credit amount. For 2020, you can take a credit of up to 50% of $10,000 per employee per year. For 2021, you can take a credit of up to 70% of $10,000 per employee per quarter.
4. File Form 941-X by the Deadline
You still have time to claim the ERC, even if you didn’t include it with your 2021 or 2022 taxes. You have three years from the date of the initial tax return or two years from when you paid the tax, whichever is later. Use Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, which essentially amends your original payroll tax return (Form 941) and allows you to claim the ERC retroactively.
5. Ensure All Your Numbers Are Accurate
Double-check your math before filing your amendment form. You never want to make a mistake and create further issues with the IRS. Keeping clear records and being as accurate and thorough as possible helps you avoid mistakes and costly penalties.
Taking these simple steps to calculate qualified wages for employee retention credit will help you maximize the benefits provided by this important program. Don’t forget that discussing your situation with a tax expert is always a good idea.
FAQs about the ERC and Qualified Wages
Not all employers can take the full ERC, or they may not have any qualifying quarters in 2020 or 2021. However, most employers qualify since so many businesses were negatively affected by the COVID-19 pandemic. Here are some additional frequently asked questions, with answers, about the ERC and qualified wages:
- Do wages for both part-time and full-time employees qualify? Yes. The ERC is not limited to full-time employee wages. You can include employees’ wages and health plan costs, as long as you are only calculating the first $10,000. This can be confusing since large employers are determined based on the number of full-time employees they have.
- I am considered a large employer. What wages can I use to calculate the ERC? Large employers can only include wages paid to employees for not providing services, not all wages paid to employees.
- What is the statute of limitations for the ERC? You generally have until the tax deadline in 2024 to take the 2020 ERC and until the tax deadline in 2025 for the 2021 ERC.
- Is the ERC refundable? Yes. The ERC is a fully refundable tax credit. This means that the credit can cover your tax liability, and if there is anything left over, you will get the rest of your credit in a cash payment.
- How much could I receive for the ERC? Qualifying businesses can take up to $5,000 per employee per year in 2020, and $21,000 per employee per year in 2021. That’s up to $26,000 per employee for the covered period.
- Can I get an advance refund? You may be able to claim an advance ERC refund if you were a small employer and the amount of your credit is more than your employment tax deposits made for the pay period. Form 7200 is used for the advance refund.
The ERC can have a huge impact on your business when you’ve gone through pandemic-related hardships. Don’t wait to determine your eligibility – figure out which quarters qualify, and file Form 941-X to amend your original return. Talk to an ERC expert if you still have questions about the ERC and all its advantages.
Up-To-Date Facts on Qualified Wages for the Employee Retention Credit in 2023
- Great news for employers! The employee retention credit has been extended until December 31, 2023.
- Employers who qualify can receive a refundable tax credit of up to 70% of the wages they pay their employees from January 1, 2023 through December 31, 2023. This can be claimed against their share of Social Security taxes.
- When it comes to qualified wages, eligible employers can include all remuneration paid to employees during this time period, but there are certain limitations.
- Each employee can receive up to $10,000 per calendar quarter in qualified wages in 2023. So, the maximum amount of qualified wages an employee can receive in 2023 is $40,000.
- Employers whose gross receipts are less than 80% of what they were for the same calendar quarter in 2019 may be eligible for the credit.
- If an employer wasn’t around during Q1 or Q2 of 2019 but was present during Q3 or Q4 that year, they could use the corresponding quarter from their first year of existence instead.
- For employers who had more than 500 full-time employees during any calendar quarter in either 2019 or 2020, only wages paid to employees not providing services due to a full or partial suspension of operations or a decline in gross receipts will be considered as qualified wages.
Contact ERC Today to Discuss Qualified Wages for the ERC
The Employee Retention Credit has been a much-needed lifeline for companies looking to retain their employees amid the COVID-19 pandemic. Losses in gross receipts and business closures are common due to many states closing or limiting business operations over the course of 2020 and 2021.
The ERC has been an important source of aid during these unprecedented times, and employers must understand all available support options and be sure they are taking advantage of all possible opportunities. Consider reaching out to a seasoned tax credit professional today to ensure you’re making wise financial decisions.
The experts at ERC Today know exactly how to help you succeed. We make it easy to start your initial ERC application online. We’re always here to answer your questions about the ERC and your eligibility, as well as how to calculate your credit based on employee wages and health plan costs.
Contact ERC Today for more information about your employee retention credit options.
