The Employee Retention Credit (ERC) has proven to be a vital financial lifeline for businesses during challenging economic times, particularly in response to the COVID-19 pandemic. To maximize the benefits of this tax credit, it’s crucial to understand what qualifies as “qualified wages” under the ERC and how they are calculated. In this blog post, we’ll take a deep dive into qualifying wages for the ERC.
Understanding Qualified Wages
Qualified wages are a key component of the ERC calculation. They are the wages that qualify for the tax credit and can vary based on the size of your business and the specific time period for which you are claiming the credit. Here are the key factors to consider:
1. Size of Business:
The ERC has different rules for businesses based on their size:
- For employers with 100 or fewer full-time employees in 2019: All employee wages qualify for the ERC, whether the business experienced a full or partial suspension of operations or a significant decline in gross receipts. This applies for both 2020 and 2021.
- For employers with more than 100 full-time employees in 2019: Only wages paid to employees who were not providing services due to a full or partial suspension of operations or a significant decline in gross receipts qualify for the ERC. This applies to 2020 and 2021 as well.
2. Time Period for Qualified Wages:
The ERC is available for different time periods, including:
- For 2020: Wages paid from March 13, 2020, through December 31, 2020.
- For 2021: Wages paid from January 1, 2021, through December 31, 2021.
3. Maximum Amount of Qualified Wages:
For each employee, the maximum amount of qualified wages that can be considered for the ERC is $10,000 per quarter. This means that, for any given quarter, you can claim a maximum ERC of $5,000 per employee for 2020 and a maximum of $7,000 per employee for 2021.
Calculating Qualified Health Plan Expenses:
In addition to wages, qualified health plan expenses can also be factored into the ERC calculation. These expenses include amounts paid or incurred by the employer to provide and maintain a group health plan for employees. It’s important to note that qualified health plan expenses cannot exceed the amount paid as if the employee had been working.
Special Considerations for 2020 and 2021:
For 2020, the ERC is calculated at a rate of 50% of qualified wages per employee, up to the maximum of $5,000 per employee for the entire year. In contrast, for 2021, the ERC rate is 70% of qualified wages per employee, up to the maximum of $7,000 per employee per quarter.
Documentation and Record-Keeping:
Proper documentation and record-keeping are essential when claiming the ERC. It’s crucial to maintain records of qualified wages, health plan expenses, and the eligibility criteria met, such as government orders leading to a full or partial suspension of operations or a significant decline in gross receipts.
Common Mistakes to Avoid:
While navigating the ERC and qualifying wages, businesses should be aware of common mistakes that can affect their claims. These include miscalculating qualified wages, failing to consider the employee size threshold, and not properly documenting eligibility criteria.
Conclusion: Leveraging Qualified Wages for ERC Benefits
Understanding what qualifies as “qualified wages” under the ERC is crucial for businesses seeking to access this valuable tax credit. By accurately calculating qualified wages and factoring in eligible health plan expenses, businesses can maximize their ERC benefits and receive the financial support needed to retain employees during challenging economic times.
As you explore the complexities of ERC and qualified wages, it’s advisable to seek guidance from tax professionals or refer to the official IRS guidance for the most up-to-date information. Properly leveraging qualified wages can significantly contribute to your business’s financial stability and ensure you make the most of this important relief program.