Recognizing the significance of retaining valued employees, the U.S. government introduced the Employee Retention Credit (ERC) as part of the COVID-19 relief efforts.
Understanding qualified wages is crucial for businesses seeking to not only weather economic uncertainties but also maximize financial incentives. Below, we dive into the details of qualified wages for the Employee Retention Credit, shedding light on the eligibility criteria, potential benefits, and practical considerations that can help businesses optimize their employee retention strategies while bolstering their bottom line.
What Are Qualified Wages?
To successfully claim credits under the Employee Retention Credit (ERC), it is essential to understand the criteria for qualified wages. Qualified wages eligible for claiming credits include those subject to FICA taxes, encompassing specific health expenses. These wages must have been paid during a period or calendar quarter when a business suspended its operations, specifically from March 13, 2020, through December 31, 2021.
However, it is important to note that paid leave wages under the Families First Coronavirus Response Act (FFCRA) are not considered qualified wages. Similarly, the calculation of tax credits for health expenses follows the same rules as qualified wages, with a credit of up to 70% of the $10,000 threshold. Health expenses include both employer and employee pretax contributions. It is crucial to compare the number of employees between 2020 and 2021. Notably, the threshold for full-time employees was revised from 100 to 500.
For the year 2020, employers who had more than 100 full-time employees in 2019 can only consider qualified wages for employees who did not work due to business closure or decline. Employers with 100 or fewer full-time employees in 2019 can claim qualified wages paid to all employees, including those who were not working due to suspension or business decline.
In 2021, if an employer had more than 500 full-time employees in 2019, the credit can only be applied to wages paid to employees who were not working due to forced closure or revenue reduction. If an employer had fewer than 500 full-time employees in 2019, the credit can be applied to wages paid to all employees during a period when the business experienced closure due to government orders or a decline in revenue.
Qualifications For The ERC
The Employee Retention Credit (ERC) is accessible to eligible employers who have faced a substantial decline in gross receipts due to the pandemic. Generally, employers must have experienced a year-over-year reduction in gross receipts of over 50% in 2020 and 20% in 2021. To assess the decline, employers compare a given quarter in 2020 or 2021 with the corresponding quarter in 2019.
Alternatively, businesses can qualify if they had to partially or fully close due to a government order during any qualifying quarter in 2020 or 2021, irrespective of the decline in gross receipts.
The criteria for eligibility differ based on the size of the employer. In the context of the ERC, “large employers” are only able to claim the credit for wages paid to employees who were not providing services. However, it is important to note that the definition of large employers varied between the two years:
- Under the CARES Act, a large employer was defined as having more than 100 full-time employees.
- In 2021, large employers were those with more than 500 full-time employees.
It is advisable for qualifying companies to claim the credit in a timely manner. Exploring available options with a tax expert well-versed in the requirements is highly recommended.
Calculate Qualified Wages
To begin, it is essential to aggregate all qualified wages and health plan expenses for all employees during the qualifying quarters. However, for large employers, only wages paid to employees who were not providing services due to economic hardship can be included.
Ensure that you do not include wages that have already been accounted for in other relief programs. While you can still claim the Employee Retention Credit (ERC) if you have received a PPP loan, you cannot claim the same wages that were covered by the PPP funds.
For the year 2020, you are eligible to receive a credit of up to 50% of $10,000 per employee per year. In 2021, the credit amount increases to up to 70% of $10,000 per employee per quarter.
Even if you did not include the ERC in your 2021 or 2022 tax filings, there is still time to claim it. You have a window of three years from the date of the initial tax return or two years from when you paid the tax, depending on which is later. To claim the ERC retroactively, you can use Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, which amends your original payroll tax return (Form 941).
Before submitting your amendment form, it is crucial to double-check your calculations. Making mistakes can lead to further complications with the IRS. Maintaining clear records and striving for accuracy and thoroughness can help you avoid errors and costly penalties. It is always wise to discuss your specific situation with a tax expert for guidance.
Claiming the Employee Retention Credit (ERC) involves combining qualified wages and health plan expenses during qualifying quarters, with large employers including wages paid to non-working employees due to economic hardship. It is important to exclude wages already accounted for in other relief programs, such as PPP loans.
The credit amount varies, allowing for up to 50% of $10,000 per employee per year in 2020, and up to 70% of $10,000 per employee per quarter in 2021. Remember, you still have time to claim the ERC retroactively using Form 941-X, but accuracy and thoroughness are crucial to avoid errors and penalties. Seeking guidance from a tax expert can provide valuable insights for maximizing your claim.