The Employee Retention Credit (ERC) is a refundable credit for businesses who paid qualified wages during the COVID-19 pandemic. Qualified wages as a general rule applies to W2 vs 1099 employees. Established under the CARES Act, the ERC tax credit awards business owners with a refundable credit if qualified wages were paid while their business operations were either closed or restricted due to government regulations. To qualify for the ERC tax credit in the 2020 tax year, you would have had to pay qualified wages between March 13, 2020 and December 31, 2020. Some business owners may also qualify for the 2021 tax year, in which they would have had to pay qualified wages during specific quarters of 2021.
Qualified Wages Overview
Qualified wages for the ERC tax credit are defined as wages paid to employees during the 2020 or 2021 tax year. Both part-time and full-time employee wages paid are qualifying wages for ERC.
This refundable tax credit was meant to incentivize businesses who kept employees on payroll, despite business operations being impacted by the COVID-19 pandemic and regulations surrounding it. Because of this, qualified wages include employees on payroll regardless of whether they were able to work or not.
ERC qualified wages paid can include:
Cash
Salaries
Vacation pay
Hourly wages
Healthcare expenses
Other taxable wages
The wages used towards the ERC tax credit cannot be the same ones used towards other COVID-19 financial relief, such as the PPP loan.
Are There Qualified Sick Leave Wages for ERC?
The following sick leave wages cannot be used towards the ERC tax credit:
Paid FMLA and sick leave wages mandated under the Families First Coronavirus Response Act
Paid family medical leave wages under section 45S
Worker Opportunity Tax Credit wages
The Families First Coronavirus Response Act (FFCRA) requires certain business owners to pay employees up to 80 hours of sick leave because of quarantining, COVID-19 symptoms, or a medical diagnosis at the employee’s regular rate of pay. In addition, up to 80 hours of sick leave at two-thirds of the employee’s regular rate must be paid if the employee was caring for someone in quarantine, caring for a child under 18, or was experiencing a similar condition to the person they were caring for.
Under the FFCRA, 10 weeks were given for paid expanded family and medical leave at two-thirds of the employee’s regular rate of pay if they were unable to work because they needed to care for a child who could not attend school or childcare due to COVID-19 closures.
Because the FFCRA applied to certain private employees with less than 500 employees, many business owners who may qualify for ERC were required to pay employees through the FFCRA. Those wages paid cannot be used towards the ERC tax credit application, as they were required through the Department of Labor’s Wage and Hour Division.
Do Part-time Employee Wages Qualify for ERC?
Part-time employee wages qualify for the ERC tax credit as long as they were not the same qualified wages used towards other Coronavirus financial relief established under the CARES Act. Any wages paid to part-time or full-time employees qualify for the ERC tax credit as long as they were paid during qualifying periods in 2020 or 2021.
Is There a Maximum Salary for ERC Qualified Wages?
There is no maximum salary considered for the ERC qualified wages. However, there is a maximum amount that the ERC allows businesses to earn per employee. The ERC refundable tax credit allows business owners to earn up to $10,000 per year per employee for the 2020 tax year and up to $10,000 per calendar quarter per employee in the 2021 tax year. This amount incentivized businesses to keep employees on payroll during the pandemic.
2020 vs. 2021 Tax Year Wages
The percent of qualified wages for the ERC tax credit are different for the 2020 and 2021 tax years. 50% of qualified wages, or $10,000 per employee for the year, are eligible for the 2020 ERC tax credit. 70% of qualified wages, or $10,000 per employee per calendar quarter, are eligible for the 2021 tax credit.
Are Tips Qualified Wages for ERC?
Restaurants took a serious financial hit from the COVID-19 pandemic. Strict regulations meant that many food service businesses were forced to do takeout only, or had their indoor/outdoor seating seriously restricted. If you are applying for the ERC tax credit for a restaurant, you may have some employees who rely on tips as part of their wages, such as waitresses.
According to IRS Notice 2021-49, cash tips can be used as qualifying wages for the ERC tax credit if they exceed $20 in a single calendar month. At this point, they are considered “wages” for tax purposes and can be used as qualifying wages on your ERC tax credit application.
Reporting Wages to the IRS
To report qualified wages to the IRS, you must complete an ERC tax credit application. When doing so, it is best to get help from an experienced ERC consultant who can help you determine which wages qualify for the ERC tax credit. Five Star ERC Experts comprises of experienced certified tax consultants and tax attorneys who are well-versed in understanding how to navigate the IRS efficiently. They can get you in line with the IRS faster while ensuring that the wages you use towards your application are qualifying wages.