What are qualified wages for ERC
You’re manoeuvering through COVID’s economic labyrinth, and the Employee Retention Credit (ERC aka ERTC) catches your eye. But what are ‘Qualified Wages’ for the ERC? This guide will help.
Whether you’re a small business or a large corporation, it’s critical to get your calculations right. We’ll delve into how this interacts with other relief programs too.
Let’s untangle the complexities of what are Qualified Wages for ERC and help you access the support your business may be eligible for.
How To Qualify As An Eligible Employer
In order to qualify as an eligible employer for the Employee Retention Credit (ERC), you’ll need to meet certain criteria outlined by the government.
The first criterion is that your business must have undergone a partial or full suspension of operations due to government orders during the COVID-19 pandemic. While this might seem straightforward, there are exceptions. For instance, if your business was classified as essential and continued operations, you may not qualify under this criterion. Additionally, if your business successfully transitioned to remote operations during the shutdown, you mightn’t meet this requirement either.
The second factor is a significant decline in your gross receipts. Unlike the first criterion, this one is more inclusive, potentially covering all types of businesses. If you can demonstrate that your business experienced a substantial drop in revenue during the pandemic, you could qualify for the ERC.
While these criteria may seem restrictive, they aim to target businesses that suffered the most during the pandemic. It’s crucial to note that the determination of eligibility is nuanced and may require professional guidance. Misunderstanding or misapplying these criteria could lead to missed opportunities or compliance issues and even IRS auditing.
Qualified Wages and the ERC
Once you’ve determined your eligibility for the ERC, it’s crucial to understand what constitutes ‘Qualified Wages’ under this program.
Contrary to the regular understanding of wages, the ERC defines qualified wages as payments made to employees who were unable to work due to government orders or a significant decline in your company’s gross receipts.
Qualified wages include not only cash wages like salaries and hourly pay, but also other taxable wages such as vacation pay. Additionally, health plan expenses that are allocable to these wages are considered qualified. But remember, the credit is limited to the first $10,000 of compensation per employee per calendar quarter.
The definition of qualified wages varies based on the size of your business. For instance, in 2019 and 2020, businesses with more than 100 employees could claim the ERC only for wages paid to retained but non-working employees. However, in 2021, the same rule applied to businesses with over 500 employees. But for smaller businesses, they could claim the credit for all employees, regardless of their work status.
It’s also important to note the interaction between the ERC and the PPP. Initially, if you received a PPP loan, you were ineligible for the ERC. But this rule changed, and you could claim the ERC even if you’d received a PPP loan. However, wages paid with forgiven PPP loans don’t qualify for the ERC, no double dipping!
Understanding these nuances can help you maximize your benefits from the ERC.
ERC Qualified Wages: Changes From Year To Year
Navigating the changes in ERC qualified wages from year to year can be tricky, so let’s break it down to make it easier for you. Understanding the fluctuations in rules and regulations is essential for maximizing your ERC benefits.
For 2019 and 2020, businesses with an average of more than 100 employees could only claim wages for retained but non-working employees. In contrast, 2021 saw this criterion shift to businesses with an average of 500 or more employees. As you can see, the size of the business plays a crucial role in determining ERC eligibility.
Now, let’s consider businesses at the other end of the spectrum.
- For 2019 and 2020, if your business employed an average of fewer than 100 employees, you could claim the credit on all of them, whether they were working or not.
- This provision extended to 2021, where businesses with fewer than 500 employees could claim the credit for all employees.
- It’s worth noting that ERC qualified wages extend beyond cash wages to include salaries, hourly wages, vacation pay, and certain health plan expenses.
The Difference in Qualified Wages for Small and Large Employers
Building on the changes in ERC qualified wages, let’s now delve into the differences between small and large employers and how it impacts the calculation of these qualified wages for the Employee Retention Credit.
As a small employer, defined as having 500 or fewer full-time employees (FTEs) on average in 2019, you’re allowed to claim the ERC on wages paid to employees from January 1, 2021, through September 30, 2021. This applies whether or not these individuals were working, and it includes qualified health plan expenses paid during an eligible quarter. For 2020, the threshold was lower, with small employers being those with 100 or fewer FTEs on average per month in 2019.
On the contrary, large employers, defined as those that averaged more than 100 FTEs in 2019 for 2020 and more than 500 for 2021, have a different set of rules to follow. For you, qualified wages are typically wages paid to employees who aren’t providing services due to either a full or partial suspension of your company’s operations or a significant decline in gross receipts during qualifying quarters. You may also qualify for non-service wages and a proportionate amount of qualified health plan costs during an eligible quarter.
Understanding these differences is crucial to correctly calculate your ERC. It’s worth noting that the concept of ‘qualified wages’ varies depending on the size of your business and the specific circumstances under which wages are paid. These distinctions are essential as they can significantly impact your potential ERC claim.
Other Considerations for Qualified Wages Under the Employee Retention Credit
In light of these varying rules for different business sizes, you might be wondering about other factors that could affect what counts as qualified wages under the Employee Retention Credit. Other considerations come into play, particularly in relation to the Paycheck Protection Program (PPP) and how the ERC interacts with your financial records.
- Interaction with PPP: Initially, businesses that received PPP loans couldn’t claim the ERC. However, with the Consolidated Appropriations Act of 2021, businesses that received a PPP loan can now apply for the ERC retroactively to 2020. But remember, you can’t claim the ERC for wages paid with funds from a forgiven PPP loan.
- Financial Record Impact: Claiming the ERC can affect your financial statements. You should record your ERC as a credit to grant income and a debit to accounts receivable (A/R). If you received the ERC as an advance payment, you should credit the refundable advance liability and debit the cash.
- Compliance with Disclosures: It’s crucial to include disclosures in your financial statements about the accounting method/standard you chose. This ensures your compliance with IRS rules and regulations.
Though the ERC program has ended, eligible employers can still claim it by filing a Form 941-X for relevant quarters. Remember, the deadline to apply for 2020 is April 15, 2024, and for 2021, it’s April 15, 2025. Once you’ve submitted the form, verify its receipt and track the status of your ERC refund.
Understanding these considerations can help optimize your benefits from the ERC.
Examples of Qualified Wages
To better understand how the Employee Retention Credit applies to your business, let’s examine some real-world examples of qualified wages.
We’ll start with the specifics for small employers and then move onto the rules for larger employers.
These examples will shed light on the practical application of the ERC and assist you in determining how to maximize your credit.
Qualified Wages for Small Employers
As a small business owner, you’re likely curious about what constitutes qualified wages for the Employee Retention Credit (ERC). In your case, each employee earns $40,000 annually, inclusive of health plan expenses.
For ERC purposes, qualified wages include:
- Salaries: In this case, each employee’s $35,000 salary.
- Health plan expenses: The $5,000 you spend per employee on health plans also counts.
- Wages paid to non-working employees: Even if some employees weren’t providing services, their wages qualify if you kept them on the payroll.
In 2020, you could claim the ERC for 50% of the first $10,000 per employee. In 2021, this increased to 70%, significantly boosting your credit.
Qualified Wages For Large Employers
Continuing with the conversation from small to large employers, let’s delve into what counts as qualified wages for the Employee Retention Credit (ERC) if you’re operating a larger enterprise.
As a large employer, you can only consider qualified wages paid to workers not providing services due to COVID-19 restrictions. For instance, if you had 750 employees in 2019 and 250 of them stopped providing services between June 30 2020 and September 30 2020, you could claim significant tax credits.
In 2020, you could claim 50% of the first $10,000 paid per non-working employee, resulting in $1.25 million in tax credits. Moving to 2021, you could claim 70% of the first $10,000 paid per quarter, giving you $3.5 million in credits.
Conclusion
In conclusion, understanding ‘qualified wages’ for the ERC is vital in assessing your eligibility for this financial relief. Changes year-to-year and differences between small and large employers can impact calculations.
Be mindful of other COVID-19 relief programs’ interactions with the ERC. Knowledge of these nuances can empower you to make informed decisions that bolster your business resilience in these tough times.
Stay informed, stay resilient, and continue exploring ways to navigate this challenging economic landscape.
