The Employee Retention Credit is a refundable tax credit for employers who continue to pay their employees despite experiencing economic hardship due to the coronavirus pandemic. The credit is available to eligible employers who retain employee wages and pay qualifying wages between March 12, 2020 and December 31, 2020. To qualify for the Employee Retention Credit, wages must meet certain criteria outlined by the Internal Revenue Service (IRS). In this article, we will discuss what qualifies as wages for the Employee Retention Credit.
To be considered qualified wages, they must meet the following requirements:
- Wages must be paid to an employee after March 12th of 2020 and before December 31st of 2020;
- Qualified wages are limited to $10,000 per employee;
- Qualified wages cannot include any amounts taken into account under other federal relief programs such as the Paycheck Protection Program;
- Qualified health plan expenses do not count towards qualified wages.
In addition to these requirements, it is important to note that there may be different rules based on employer size and type of business. The credit is available for employers with up to 500 employees and begins at 50% up to $10k per employee for all employers regardless of size. If you have fewer than 100 employees, you may be eligible for a higher credit rate of 70% which goes up to $10k per employee.
What Are Qualified Wages
One of the key components of the Employee Retention Tax Credit (ERTC) is the ability to claim qualified wages. Qualified wages are the wages employers pay their eligible employees and are an important factor in determining the amount of the credit the employer can receive.
This article will discuss what qualifies as qualified wages under the ERTC:
Definition of Qualified Wages
The Employee Retention Tax Credit (ERTC) allows businesses to claim a refundable tax credit equal to 50% of qualified wages they pay during the COVID-19 crisis. To qualify, a business must have partially or fully suspended operations due to government orders relating to the coronavirus or experienced a significant decline in gross receipts.
In general, qualified wages are those wages paid after March 12, 2020 and before January 1, 2021 for employee labor performed in the United States. Qualified wages also include healthcare costs for which an employer pays or incurs for employees with no services received. The maximum amount of qualified wages (generally limited to $10,000 per employee) eligible for the credit is based on several factors, including:
- The amount of hours the employee worked
- Whether the employee works full-time or part-time
- The rate at which their wages were paid
- Any health plan costs associated with the employee’s employment
- The size of the business as defined by its number of full-time employees
It’s important to note that any bonus payments made by an employer may not count toward qualifying wages and should not be included when calculating ERTC eligibility.
Examples of Qualified Wages
The employee retention tax credit is a refundable tax credit established as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act. Under this program, eligible employers can apply for up to 80% of qualified wages. In order to determine the level of credit that a business is entitled to receive, it is important to understand what the definition of qualified wages is.
Qualified wages refer to those wages paid by an eligible employer after March 12, 2020 and before January 1, 2021 for employees who are providing services but not working due to certain impacts related to COVID-19. For example, if a business shut down operations or experienced a drop in gross receipts by 50% from any quarter in 2019 compared to that same quarter in 2020, it would be considered an eligible employer for purposes of the employee retention tax credit.
In general terms, wages paid for services rendered are considered qualified wages if they are attributable to periods during which:
- Actual operations were fully or partially suspended due to orders/recommendations from civil authorities related to COVID-19; or
- A significant decrease occurred with respect to gross receipts as determined under IRC Section 1400Z-2(b).
Some examples of qualified wages include salaries, bonuses, vacation pay and compensatory time off; overtime pay; sick or medical leave; healthcare benefits paid by the employer; and retirement plan contributions made by the employer on behalf of its employees.
Qualified Wages for Employee Retention Tax Credit
The Employee Retention Tax Credit allows employers to receive a tax credit for wages paid to their employees during the COVID-19 pandemic. In order to qualify for the credit, employers must understand the requirements for qualified wages. Qualified wages are defined as those that are paid to an eligible employee.
In this article, we will discuss the criteria for qualified wages and how employers can best utilize the Employee Retention Tax Credit:
Eligibility Requirements for Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) incentive was included in the Coronavirus Aid, Relief, and Economic Security Act in response to the economic fallout from the COVID- 19 pandemic. The ERTC provides a 50% tax credit for “qualified wages” paid between March 13th, 2020 and December 31st, 2020 to employees of companies impacted by the coronavirus.
Eligible employers must meet certain criteria to qualify for ERTC including having operations partially or fully suspended due to government restrictions related to COVID-19 or experiences a significant decline in gross receipts. Eligible employers must also have fewer than 500 full time equivalent employees.
For employers who are eligible, they are required to identify what it considers “qualified wages” according to the eligibility requirements of the program. Qualified wages fall into two different categories: wages paid during operations where government restrictions were imposed or when operations were temporarily suspended; and wages paid after operations resumed regardless of limitations that may still be in place due to COVID-19. The IRS has identified two distinct periods; period 1 (March 13th through June 30th 2020); and period 2 (July 1st through December 31st, 2020).
Depending on how many employees an employer has during each period can also affect how much of their qualified expenses will be deductible for their tax return – either $5,000 per employee annualized within each period or $10,000 per employee maximum throughout the year-long duration of the program – from March 13th through December 31st. Any amount over this limit is not eligible for deduction on the employer’s tax return.
Calculation of Qualified Wages
The calculation of qualified wages for the Employee Retention Tax Credit (ERTC) is distinct from other credits and deductions. Specifically, employers may claim 50% of the payroll costs incurred after March 12, 2020, when certain criteria outlined in the CARES Act are met.
Qualified wages are determined by taking an employer’s aggregate payroll costs during a calendar quarter and subtracting any sick leave or family leave credits if they have been taken. The remaining amount is considered “qualified wages” eligible to be applied to the ERTC. For employers with 100 or fewer full-time employees in 2019, these qualified wages include eligible health plan expenses paid after March 12, 2020 up to $10,000 per employee on an annualized basis.
The maximum credit that can be claimed for each employee is $5,000 each quarter, making the maximum yearly credit $10,000 for businesses with 100 or fewer employees. Self-employed individuals and sole proprietors can also apply for this program and can claim up to $5,000 in fees associated with health plans purchased through the ACA Exchanges as well as other eligible healthcare expenses as qualified wages under this program.
All companies must determine their exact eligible amount of qualified wages using a three-step calculation that takes into account their total payroll costs each quarter, any sick leave/family leave credits they have taken related to those payroll costs and associated health care expenses after March 12th 2020 (for businesses with 100 or fewer full-time employees). To ensure proper calculations are made it is important for employers to review applicable IRS guidance regarding business eligibility and calculations including potential phaseout situations where applicable.
Generally, qualified wages are those wages paid to an employee from March 12, 2020 through December 31, 2020. The tax credit is based on up to $10,000 in qualified wages paid to each eligible employee for that period. Employers can claim up to 50 percent of the eligible wages paid per quarter with a maximum of $5,000 per quarter for all employees that are subject to the Social Security Wage Base ($37,300 for 2021). Eligible employers must have experienced either a 20 percent reduction in quarterly revenues compared to the same quarter in the prior year or operations were fully or partially suspended due to orders by a governmental authority due to COVID-19 during any calendar quarter.
To summarize, qualified wages are any cash wages paid directly by the employer and that qualify for Social Security and Medicare taxes during the specified period. Qualified employer entities can take advantage of this credit as long as they have experienced either a:
- 20 percent reduction in quarterly revenues compared with their preceding fiscal year
- or they have faced business suspension due to orders from governmental authorities because of COVID-19.
Credit is permissible up to $10,000 per worker and 50 percent of overall quarterly taxable payments for all its employees subject under Social Security Wage Base ($37300 for 2021).