Qualifying wages for the ERC have been modified a few times during amendments to the program. Qualified wages are what is used to calculate your eligibility for the Employee Retention Credit. It is important to understand what constitutes qualified wages in order to take advantage of the program and maximize your benefits.
Qualified wages are what was paid after March 13, 2020 and before December 31, 2021 for an employee’s service during that period. Only full-time wage earners during that period qualify; the IRS defines a full-time worker as anyone who works an average of at least 30 hours per week or 130 hours in a given calendar month.
For businesses with less than 100 full-time employees, qualified wages include what was paid to any employee for performing services during the period even if they were laid off or furloughed due to COVID-19. For employers with more than 100 full-time employees but less than 500 employees, qualified wages include what was paid only to employees who were furloughed or laid off due to COVID-19. The amount of credit varies depending on what year(s) the layoffs occurred.
Do Health Plan Benefits Qualify as Wages?
Qualified wages can include what was paid for the health plans of an employee, but they cannot exceed what would have been paid if services were performed. For example, you cannot count what you pay towards a healthcare premium for an employee who was laid off due to COVID-19 if what you would have paid them in wages exceeds what you paid towards their health plan. Additionally, qualified wages do not include what was paid for vacation, parental, family medical or sick leave (regardless of whether or not the Public Health Emergency was declared).
Wages do not include amounts already credited towards other credits or sections of the CARES Act such as the Sick and Family Leave Credit.
Are Tips Included in Qualified Wages?
IRS Notice 2021-49 clarified that tips will be included in qualified wages “if these wages are subject to FICA.” This means that tips that amounted to at least $20 in any given month of the qualifying ERC period are to be counted as qualified wages. Tips less than $20 are wages that are not subject to FICA so they would not be qualified under the Employee Retention Credit. See 2021-49 here.
Can my child or brother be included in the ERC tax credit?
According to IRS 2021-49, any individual related to the owner cannot be claimed under ERC. The IRS defines related persons as any of the following:
- A child or a descendant of a child.
- A brother, sister, stepbrother, or stepsister.
- The father or mother, or an ancestor of either.
- A stepfather or stepmother.
- A niece or nephew.
- An aunt or uncle.
- A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. An individual (other than a spouse, determined without regard to section 7703, of the taxpayer) who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household.
Source: IRS publication, page 26
It is important to note that what constitutes a related person can vary by state.
Is spousal employee income included in ERC?
Spouses may be eligible to qualify for Employee Retention Credit. If spouses are employees of the corporation, they may qualify, even though they are 100% owners of the corporation.
Can I claim wages in both the R&D credit and ERC program?
No, the portion of wages that were claimed for an R&D credit cannot be claimed in the Employee Retention Credit. Wages that qualify as both must be allocated between the two programs.
The portion of the wages not used to claim an R&D credit can be used to claim an ERC. Additionally, while both credits are refundable, the ERC is a credit that is paid directly to the employer. The R&D credit must be claimed on Form 3800.
On the other hand, wages claimed on the PPP are allowed for qualification under the R&D Credit criteria.
What are gross wages and receipts for the ERC?
For taxable businesses, gross receipts include sales, dividends, interest paid, rent received, and royalties. It does not include what was received from the Paycheck Protection Program (PPP).
Can a non-taxable entity qualify its income for ERC?
Yes, gross receipts from non-taxable operations qualify as wages under the ERC. This includes proceeds from investments, grants received, and cash receivables. However, these types of gross receipts do not qualify for the R&D Credit.
Do churches, synagogues and places of worship qualify for ERC?
Yes, insofar as government restrictions forced the stoppage of gatherings and services, these entities also qualify for credit. Similarly, 501(c)(3) entities are also eligible for the ERC. However, with respect to religious organizations that received PPP loans, if the loan is forgiven in whole or in part, the amount of such loan forgiveness will not be allowed as qualified wages for the Employee Retention Credit.
Can wages be claimed in multiple quarters?
Yes, a business may claim qualified wages paid during any one quarter in both the ERC and PPP program as long as they meet all requirements for each respective program. Additionally, if an employee’s wages were paid in multiple quarters, the employer may claim those wages for ERC credit as long as they meet all requirements.
Please consult with a tax professional or financial advisor if you have any questions regarding what qualifies as wages for the employee retention credit or what applies as qualified wages for your business. This information does not constitute legal or tax advice and is for informational purposes only. You should contact a qualified professional before making any decisions regarding the Employee Retention Credit (ERC) or related tax credits. The information presented here may not be applicable to you or your business, and all situations may vary.
