Employers can get a refundable payroll tax credit of up to $26,000 per W-2 employee through the Employee Retention Credit (ERC). The ERC, which is available under the CARES Act to businesses affected by COVID-19, has proven to be a lifeline for numerous businesses around the USA.
Currently, many eligible employers are either unaware of the ERC or assume they do not qualify since they have taken the PPP (Paycheck Protection Program), which is a widespread fallacy. This is totally false. You may still be eligible for the ERC if you received the maximum credit of PPP from social security, but you will not be able to double-dip on those wages when figuring the ERC.
The number of employees on the payroll of an eligible company as well as recovery startup businesses determine the definition of qualifying wages and qualified health plan expenses.
Key ERC Credit Takeaways You Will Learn:
- Qualified Wages: Understand what constitutes qualified wages for the Employee Retention Credit.
- ERC Calculation: Learn how to calculate Employee Retention Credit for your business in 2021.
- Real-life Examples: Grasp the concept through various examples illustrating different employee scenarios.
- ERC Taxability: Discover if the Employee Retention Credit is considered taxable income.
- Future Outlook: Stay updated with information about the Employee Retention Credit in 2023, 2024, and 2025.
See Important 2024 Employee Retention Tax Credit Deadline Information at the Bottom of This Article.
What are Qualified Wages?
Most people make it so difficult to understand the meaning of qualified wages, which creates so much confusion. In a normal language, qualified wages are the payment paid to a particular employee who withdraws under the Act for a passing explanation, up to the fitting outlay and total installment covers.
Again, it doesn’t actually just mean literal wages; it includes the employee taxable wages as well as health costs. There are a lot of industries that definitely were impacted by the pandemic and would definitely qualify, but some of them, unfortunately, don’t have the type of workforce that would qualify and fit this credit.
Qualifying compensation implies the wages acquired by a passing representative start on the recruit date and finish on the subsequent date of the passing worker.
What Wages Qualify for the Employee Retention Credit?
Qualified wages are those salaries paid to companies that are not delivering services because of operations being halted or due to a drop in gross receipts, and if a business averaged over 100 full-time employees in 2019. Eligible employers who meet these criteria can only count earnings up to the amount an employee would’ve been paid for working a comparable amount of time in the 30 days before the period of economic hardship.
Qualified wages are those payments paid to any employee during the period operations ceased or the period of the reduction in gross receipts (quarterly), regardless of whether the employees supplied services. For 2020 and 2021, qualified salaries and health insurance costs are restricted to $10,000 per employee and $10,000 per quarter.
The full-time employee requirement for applying for the ERC was raised in 2021. If an employer had 500 or fewer full-time employees on average in 2019, and their activities were partially interrupted, or they passed the gross revenues test, they would be eligible for the credit. Read full do restaurants qualify for ertc details here.
Qualified Wages for Employee Retention Credit
Remember that you may only use the credit on earnings that haven’t been forgiven or aren’t expected to be forgiven under PPP.
The IRS has many methods for assessing eligible health costs, depending on the circumstances. They usually contain the pretax part of the eligible employer and employee but not any after-tax sums.
Before defining the eligible income that should be included, a company must first specify the number of full-time employees.
For the purposes of employee retention borrowing, a full-time employee is defined as one who worked 30 hours a week or 130 hours per month in any calendar month in 2019, and this definition is based on the ACA‘s (Affordable Care Act) employer communicated liability provision.
Employers who were open all year in 2019 or 2020 should divide their total number of full-time staff by 12 to get a total couple of additional employees.
The number of full-time employees is derived by multiplying the total number of full-time staff in each full calendar month in 2019 or 2020 in which the company runs by the number of months.
Qualified wages, which include specific health expenditures and are subject to FICA taxes, are permitted for claiming credits. They must have been paid during a period or calendar quarter when a firm was shut down. This applies to the period from March 13, 2020, to December 31, 2021.
Similarly, while computing the refundable tax credit, which is up to 70% of the $10,000 level, particular health costs are subject to the same regulations as qualifying earnings. The pre-tax payments of both the employer and the employee are included in the health costs.
To assist in making an educated selection, the IRS provides additional detailed criteria on eligible earnings and health plan expenditures. The IRS advises that qualifying earnings are determined by an eligible employer’s number of full-time workers. Check out 5 Ways to Determine Eligibility for the Employee Retention Credit.
The employment number variable requires a comparison between 2020 and 2021 for clarity. It’s also worth noting that the full-time personnel count was increased from 100 to 500.
Employers with more than 100 full-time workers in 2019 can only take into account the qualifying salaries of employees who did not work owing to a firm shutdown or decrease in 2020. Employers with 100 or fewer full-time workers in 2019 can claim all eligible wages paid to all employees, including those paid while the firm was suspended or declined.
In 2021, if a business had more than 500 full-time workers in 2019, the credit is only available for salaries given to employees who were unable to work owing to a forced closure or revenue loss.
Credit could be given to wages paid to all employees during a period when the firm was closed owing to government orders or a drop in income if the employer employed less than 500 full-time employees in 2019.
Why Apply for Employee Retention Credit?
It’s a little hard to believe that more people are not talking about the employee retention credit that’s available to businesses that have w-2 employees on the documents. We’re here to talk about the potential of getting $33,000 per employee back in a tax credit that directly belongs to your business.
The employee retention credit is something that business owners can apply for, and of course, the Internal Revenue Service is backed up, and it might take a few weeks and maybe even a few months, but this money, potentially tons of thousands of dollars, comes right back to you.
If you want to dive right into the questions, you can just click up the button where it says Begin Qualifying. After clicking the button, you will see there is a little disclaimer that basically says that this robust stimulus is a program that was basically created by the CARES act, which will require you to upload some documents. Remember that you have already paid the money in the payroll taxes to the IRS, and you will be getting the money back. Check out more about How to Apply for Employee Retention Credit.
How to Calculate Employee Retention Credit 2021?
Employee retention credit wasn’t really a huge topic of conversation back in 2020 because you could not get this tax credit for retaining your employees if you got PPP, and for most people, it made sense to get the fully forgiven money of PPP and use it how they needed to, and they didn’t really fool that much with ERTC, but now the rules have changed.
In 2020, the Employee Retention Credit was equivalent to half of the qualified representative wages paid in a scheduled quarter. The financial status applies to compensation finance on the 12th day of March 2020 and before the 1st day of January 2021. Qualified compensation per laborer expands to $10,000, so the best credit for qualified pay paid to any delegate is $5,000 during 2020. For 2021, the Employee Retention Credit is comparable to 70% of qualified delegate compensation paid in a timetable quarter. Qualified pay per delegate expands to $10,000 per plan quarter in 2021, so the best credit for qualified pay paid to any laborer is $28,000 during 2021. Check out more about 5 Ways to Calculate the Employee Retention Credit.
The computations can be precarious. This is the thing you want to do:
Validate whether you had representatives sooner or later in the year 2021 or 2020.
If you have not used any workers in 2021 or 2020, you’re not equipped for the employee retention credit. You could, anyway, meet all prerequisites for paid leave credits.
Layout whether you encountered a passing conclusion.
Expecting your business was totally or somewhat suspended during a timetable period due to orders from an administrative power limiting exchange, travel, or assembling get-togethers in light of COVID-19, you might be equipped for ERC for that quarter. If not, you could, regardless, qualify to take into account a decline in gross receipts.
Confirm business pay in 2019 with the time for which employee retention credit is declared.
To assist with concluding whether you fit the bill for the ERC, the IRS demanded that you contemplate your business pay in each critical quarter of the required years to a comparative timetable quarter in 2019. In 2020, your pay most likely came around over half. In 2021, your pay for the current or going before quarter most likely came around more than 20%. If you don’t have the foggiest idea, the gadgets on the market will help you with surveying this.
If payment hasn’t come around more than 20%, you could, anyway, possess all the necessary qualities for the ERC expecting your business movement has been fairly or totally suspended as a result of government orders confining exchange, travel, or assembling social occasions in view of COVID-19.
If payment hasn’t dropped enough and your business undertakings haven’t been to some degree or totally suspended thus, you’re not equipped for the ERC. However, you could anyway meet all necessities for paid leave credits.
Enter qualified wages, and the prosperity plan costs finance during the time for which you qualify.
Then, at that point, enter qualified wages paid to all laborers for the hour of your full or midway suspension of exercises or the quarter for which you experienced a significant decline in gross receipts. Not working on account of COVID-19 between March 13 and June 30. Qualified pay consolidates wages and prosperity plan costs paid for the hour of your financial trouble.
For greater organizations, paid qualified wages will regularly be confined to wages and health plan costs for the time span that an agent isn’t working, a direct result of the money related trouble (and, for 2020, may not think about extensions in pay after the beginning of the monetary trouble).Learn more about Employee Retention Credit: How to Calculate.
Qualified Wages Paid for Employee Retention Credit Example
In most circumstances, this entails filing Form 941, Employer’s Quarterly Federal Tax Return, to collect the credits. If an employer subsequently discovers that they qualify for the credit, they can update their Form 941.
On your federal employment tax return, provide the entire qualified leave wages. Fill out Form 7200 (not available after 31st Jan 2022) as soon as possible after the conclusion of the quarter in which you paid the eligible salaries. Don’t forget to account for advance amounts when filing Forms 941, 944, or 943.
Form 7200 can be used to obtain an early payment for the ERC until August 2, 2021, as per the IRS. Furthermore, new enterprises incorporated after December 31, 2020, will not be able to file Form 7200 to request early payment of the Employee Retention Credit.
Eligible employers can get a maximum ERC of $7,000 per employee per quarter in 2021, as a reminder. Employees are eligible for credits worth 70% of their qualifying salaries and related qualified health plan expenditures. Check out Everything to Know About Employee Retention Credit – ERC Example.
One Employee:
Assume you have one employee who receives $10,000 in qualified wages in the first quarter of 2021. You would receive a $7,000 credit as an employer ($10,000 x 70%).
One Employee With Healthcare Costs:
Let’s imagine you pay your one employee $5,000 in qualified wages in one quarter, as well as $1,000 in qualified employee health insurance. Multiply the sum of your eligible salary and employee health insurance by 70 percent.
[($5,000 + $1,000) X 70%] Your overall credit would be $4,200.
Several Employees:
Assume you have three workers. During the quarter, you pay two of your three workers $10,000 in qualifying compensation and the third employee $20,000 in qualified wages. Because eligible wages per employee are limited to $10,000 per quarter, the credit would indeed be $21,000 ($7,000 X 3).
Employee Retention Credit Owner Wages
The Employee Retention Credit, along with other COVID-19 pandemic initiatives, took the world by storm in 2020 and 2021. But what about the salaries of shareholders? Is it possible to claim the credit for owner salaries as well?
It depends on the circumstances whether ERC owner wages qualify for the retention credit. But, before we dive into the owner salary and the Employee Retention Credit, let’s take a quick look at shareholders and their pay.
Wages paid to persons who are more than 50% owners’ relatives do not count as wages under the ERC. Wages paid to an owner and his or her spouse, on the other hand, are eligible for the credit.
A dominant shareholder with greater than 50% ownership and if the salaries were given to a “connected individual.” Furthermore, attribution of ownership might exclude some earnings from the ERC.
Wages for Employee Retention Credit shareholders might be tricky. Check out the samples below to get a better picture of how it all works and whether your company qualifies for the credit.
Example 1:
Consider the case of a parent who owns 100% of a company and employs his son. The Employee Retention Credit does not apply to the son’s earnings since he is related to the more-than-50 percent owner.
The son is also considered an indirect owner of the corporation due to familial attribution. This also eliminates the father’s earnings from the ERC.
Example 2:
Pam is the only owner of ABC Corporation. Meredith, her only child, is not employed by the firm and has no ownership stake. Pam is paid by ABC Corporation. Meredith is given 100 percent ownership of ABC due to attribution regulations; therefore, both Pam and Meredith are recognized as 100 percent owners.
Even if Meredith does not work for the firm, Pam’s salary is not eligible wages for the ERC due to direct and indirect ownership.
Employee Retention Credit FAQ
Each employee’s qualified wages are restricted to $10,000 in total pay, including health benefits.
The IRS revised the FAQ to add an order from a local health agency that required a workplace closure for cleaning and sanitizing. In addition, FAQ #28 states that whether a trade or company’s activities are regarded as essential or non-essential varies by jurisdiction and is evaluated by reference to the governmental order impacting the employer’s trade or business operations.
Several FAQs have been revised to clarify when an important business may be regarded to be temporarily suspended, despite the fact that the distinction between essential and non-essential enterprises remains.
Although a previous version of the FAQs said that the IRS expected to give future advice on how a tax-exempt organization calculates gross receipts, the IRS has yet to do so. A new Example 3 in FAQ #58 demonstrates how an employer can use pre-tax salary reduction payments to a qualified 401(k) plan as eligible wages and also money paid to maintain a collective health plan that can be allocated to wages.
Employer matching (or non-elective contributions) to a qualifying 401(k) plan, as well as any employee pre-tax salary decreased ability to contribute to a dependent care assistance program or eligible transportation perks, are not considered qualified compensation.
Check out more about Employee Retention Credits FAQ.
Is the Employee Retention Credit Taxable Income?
The deduction for the percentage of wages received equal to the total of certain credits computed for the taxable year is typically prohibited by Section 280C(a) of the Code. The refundable element of the credit, as well as the amount of the credit that decreases the employer’s relevant employment taxes, are not included in the gross income of the employer.
If a popular employer qualifies for the Employee Retention Credit on other grounds, the amount will be credited regardless of whether the firm files and pays its current federal taxes through a 3rd payer. The Staff Retention Credit is not applicable for earnings remitted on behalf of the firm, independent of whether the third party is considered an “employer” for these other aspects of the Internal Revenue Code.
Learn more about All About Employee Retention Credit Taxable Income.
Employee Retention Credit 2022
Government laws may be confusing, especially when rules and deadlines are continually changing. This is what the Employee Retention Tax Credit is doing (ERTC).
The initial date for the ERTC retroactive period, January 1, 2022, had been pushed back to October 1, 2021. There are also adjustments in qualifications.
Businesses employing 100 or fewer full-time staff may be eligible for a pay credit of 100%. Whether the company is open today or under a shutdown order, this rule applies.
To be eligible, the company must be in the private sector or a tax-exempt organization, and the following events must occur in 2020 or 2021:
During COVID-19, operations may be completely or partially halted due to government restrictions on commerce.
A recovery startup business with yearly gross sales of $1 million or less and an ERC ceiling of $50,000 that launches after February 15, 2020. Employers can now exclude the amount of:
- Repayment of a PPO loan
- Shuttered Venue Operators Grant Amount
- Grant amount from the Restaurant Revitalization Fund
When evaluating eligibility for ERTC, these amounts do not need to be included in gross revenues.
Conclusion and Summary on What Wages Qualify for the Employee Retention Credit
Even if there were many changes in the rules by the IRS on Employee Retention Credit, the calculations of what wages are qualified for ERTC have not changed a lot. There are certain rules that are applied when it comes to qualifications for ERC.
If you are qualified for ERTC with all the above mentioned guidelines then you can get the benefits of ERTC on qualified wages paid to employees in businesses that are affected due to COVID-19.
ERC PDF Download of This News Article
Download a PDF version of What Wages Qualify for the Employee Retention Credit?
Help in Claiming the Employee Retention Tax Credit (ERC / ERTC): Receive Up to $26,000 Per Employee for Your Business
Disaster Loan Advisors can assist your business with the complex and confusing Employee Retention Credit (ERC) and Employee Retention Tax Credit (ERTC) program.
Depending on eligibility, business owners and companies can receive up to $26,000 per employee based on the number of W2 employees you had on the payroll in 2020 and 2021.
The ERC / ERTC Program is a valuable tax credit you can claim. This is money you have already paid to the IRS in payroll taxes for your W2 employees.
Schedule Your Free Employee Retention Credit Consultation to see what amount of employee retention tax credit your company qualifies for.
ERC Deadline Urgency in 2024
April 15, 2024 Deadline for the 2020 ERC Tax Year
The deadline is coming up for the final opportunity to retroactively claim your business Employee Retention Credit for the past 2020 tax year. With the April 15, 2024 deadline fast approaching, we urge you; don’t let this final chance pass!
While not all businesses will qualify, as it depends on multiple factors per IRS Rules and Guidelines, you might be leaving significant financial relief on the table from prior COVID impact to your business during the past 2020 and 2021 business operation years.
Last year, in September 2023, the IRS temporarily paused processing ERC Claims for the remainder of last year. We at Disaster Loan Advisors (DLA) predicted this over one year ago when we made this ERC video warning business owners. See the ten-minute mark of the video for details.
TAKE ACTION NOW IN 2024
Even though the IRS has temporarily paused processing, you will still want to check eligibility and file now (if you qualify) because once the IRS will resume processing, ERC tax credit claims are processed in the order they are received.
If you haven’t previously filed for the ERC Credit, it is worth scheduling a phone call to at least explore your possible eligibility from both the past 2020 and 2021 business tax years. Contact us today for a deep-dive analysis to determine if your business qualifies one or more quarters from the 2020 and / or 2021 tax years.
Cover Image Credit: 123RF.com / Pressmaster / Disaster Loan Advisors.
As a leading dedicated member of the Tax and Accounting Team at Disaster Loan Advisors™, Mark focuses on unlocking the ERC Tax Credit's potential for eligible firms that qualify, providing strategic advice, and detailed guidance to ensure substantial financial recovery and growth. His methodical approach to client engagement includes comprehensive deep-dive analysis, customized consultation and guidance, and a commitment to achieving tangible results for each business served.
Disaster Loan Advisors™ (DLA) offers a comprehensive suite of services designed to navigate the complexities of the Employee Retention Tax Credit (ERC) program, ensuring that qualified businesses leverage the maximum possible benefit with minimum hassle. Unlike some firms that charge exorbitant contingency or percentage-based fees (often between 10% to 30% of your ERC refund), DLA operates on a fair and reasonable, transparent flat-fee structure that aligns with the IRS's guidelines.
If you are looking for an ERC Company that believes in providing professional ERC Services and value for small business owners, in exchange for a fair, reasonable, and ethical fee for the amount of work required, Disaster Loan Advisors™ is a good fit for you. STAY SAFE. STAY COMPLIANT. KEEP MORE OF YOUR REFUND.™
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