How To Determine Qualified Wages For The Employee Retention Tax Credit
Use this complete guide to determine what qualifies as wages for the Employee Retention Tax Credit and maximize your business's tax refund.
As tax season approaches, you might be hearing the term Employee Retention Credit (ERC) more, along with other terms like qualified wages.
So, what exactly are qualified wages for the Employee Retention Credit (ERC)? These employee wages are what will be considered by the IRS when they determine how much you will receive in refundable payroll credit.
Read on to learn exactly what wages are considered qualified for the ERC!
Table of Contents
- What Are Qualified Wages For The Employee Retention Credit? The Quick Answer
- What Wages Qualify For The Employee Retention Credit?
- What Wages Don’t Qualify For The Employee Retention Credit?
- What Is Full-Time Equivalent When Claiming The ERC?
- The Bottom Line On Determining Qualified Wages For The Employee Retention Credit
- FAQs About Determining Qualified Wages For The ERC
What Are Qualified Wages For The Employee Retention Credit? The Quick Answer
Qualified wages are wages that will be under consideration when you apply for the ERC. They are wages paid between March 15th, 2020 and September 30th, 2021. The period for qualified wages does extend beyond the September deadline for certain businesses.
While there are many different requirements businesses must meet in order to claim the ERC for 2020 and/or 2021, the definition of qualified wages is the same from year to year and calendar quarter to calendar quarter. These wages are the basis of the ERC and what you can expect to receive once you’ve applied for the ERC. Learn more about how to calculate how much you will receive with the ERC in our article on how to calculate your employee retention credit.
What Wages Qualify For The Employee Retention Credit?
There are several different kinds of wages that count when you qualify for the ERC. Some of them you can probably guess (like salaries paid during COVID economic shutdowns), but others might surprise you!
Wages Paid During A Full Or Partial Suspension Of Business Operations
If your business experienced a partial or full suspension OR experienced a significant decline in gross receipts and you continued to pay your employees, your business may qualify for the ERC.
Qualified wages for 2020 must have been paid between March 15th, 2020 and December 31st, 2020
Qualified wages for 2021 must have been paid between January 1st, 2021 and September 30th, 2021. There are some exceptions to this end date, if your business is considered a recovery startup business, you can count wages through December 31st, 2021 towards your ERC.
Wages Paid By A Business Experiencing A Significant Decline In Gross Receipts
Businesses that experienced a significant decline in gross receipts from 2019 to 2020 or 2021 are eligible to claim the ERC. The IRS defines a significant decline in gross receipts differently in each year the ERC can be claimed.
In 2020, the IRS defined a significant decline in gross receipts as a calendar quarter that is 50% less than the same calendar quarter in 2019. Once your gross receipts are greater than 80% compared to the corresponding 2019 calendar quarter, the period of significant decline ends in the NEXT calendar quarter. For example, if your business meets the 8o% threshold in February, the period of significant decline ends in April.
In the Relief Act of 2021, the IRS defined a significant decline in gross receipts as a quarter where gross receipts are less than 80% of the same quarter in 2019. If your business didn’t exist in 2019, the IRS now allows you to determine a significant decline in gross receipts by comparing the calendar quarter in 2021 to its gross receipts in the same calendar quarter in 2020.
In the American Rescue Plan Act of 2021, the IRS amended the credit to make it available in the third and fourth calendar quarters of 2021 to “recovery startup businesses” who otherwise did not meet the previously stated eligibility criteria.
In the Infrastructure Investment and Jobs Act (IIJA), the IRS created limited availability for the fourth calendar quarter of 2021 to recovery startup businesses.
Wages Subject To FICA Taxes
Only wages that are subjected to the Federal Insurance Contributions Act U.S. Federal Payroll Tax (FICA) are considered qualified wages.
Wages that are subject to FICA taxes:
- Cash wages (salaries, hourly wages)
- Tips earned in a calendar month that total to more than $20
- Vacation pay
- Certain health insurance expenses
Health Expenses That Count As Qualified Wages
Certain health expenses are also considered qualified wages. The definition of these qualified health plan expenses is vast and technical and you can read the IRS FAQ document about tax credits for paid leave prior to April 1, 2021.
The basic standard for determining if a health plan expenses can be considered qualified wages is if the payment is made on a pro-rata basis to covered employees (an example of this is the average premium for all employees covered by a policy) and pro-rata on the basis of periods of coverage (relative to the time periods that wages are eligible to be qualified).
What Wages Don’t Qualify For The Employee Retention Credit?
The majority of regular wages are considered qualified wages when applying for the ERC. There are some exceptions that aren’t super obvious if you haven’t done a lot of reading on the ERC, read on to learn more about them.
Wages Exempt From Social Security & Medicare Taxes
If you pay wages to employees that are exempt from Social Security & Medicare Taxes, those wages are not considered qualified wages and cannot be applied towards the ERC.
Wages Paid To Former Employees
If you paid wages to former employees that are no longer employed by you during the specified timeframe, those are not considered qualified wages and cannot be applied to the ERC.
Wages Paid To Relatives
Wages that you paid to relatives do not count as qualified wages and cannot be applied towards the ERC. If you are a small business owner or co-own with a family member, you might run into issues with this category of wages.
The IRS defines a relative as:
- A child or grandchild
- A sibling or stepsibling
- Parent or grandparent
- A niece or nephew
- An aunt or uncle
Wages Used For Other Tax Credits
Wages that are used towards other tax credits do not count as qualified wages and cannot be applied toward the ERC. This includes paid family leave medical credit, Work Opportunity Tax Credit, and qualified sick and/or family leave credits. If you have wages that were covered or that you expect to be covered by a Paycheck Protection Program (PPP) loan, those wages are also not considered qualified wages and cannot be applied towards the ERC.
What Is Full-Time Equivalent When Claiming The ERC?
The IRS defines a full-time employee as an employee who is employed on average at least 30 hours of service per week or 130 hours of service per calendar month. It’s important to know how many full-time employees you have because this will change the percentage of the wages you paid you will receive back as an ERC.
Calculating FTE For The Employee Retention Tax Credit
The number of full-time employees in your business impacts the percentage of qualified wages that are eligible for the ERC. Like the majority of ERC qualifications, there are differences between the requirements in 2020 and 2021.
In 2020, 50% of qualified wages were eligible for the ERC.
- For businesses with 100 or fewer average full-time employees in 2019, wages paid to employees providing services AND not providing services are considered qualified wages.
- For businesses with greater than 100 average full-time employees in 2019, ONLY wages paid to employees not providing services are qualified wages.
In 2021, 70% of qualified wages paid between January 1st and June 30th were eligible for the ERC.
- For businesses with 500 or fewer average full-time employees in 2019, wages paid to employees providing services AND not providing services are considered qualified wages.
- For businesses with 500 or greater average full-time employees in 2019, ONLY wages paid to employees not providing services are qualified wages.
The Bottom Line On Determining Qualified Wages For The Employee Retention Credit
After this article, you hopefully have a better idea of what wages may be considered qualified for your small business as you begin your journey toward applying for the ERC or filing your taxes and claiming your ERC.
Don’t worry if you’re not sure where to go from here. We have a whole host of articles written specifically for small business owners like you! Especially if you are looking for companies to help you with ERC funding or if you want to know if you can apply for both the ERC if you had received PPP loans.