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Have you considered if your business may be eligible for the Employee Retention Credit (ERC)? After learning more about it, you may be curious about which wages would potentially qualify you for this crucial tax refund. Let’s explore:
Staying on top of all the details of the ERC could be a full-time job — that’s why we exist. In addition to the frequent government mandates and changing rules, many business owners could benefit from professional help with understanding the qualifications.
So, as a business owner, how do you determine if you are eligible for a refund to help offset some of the wages you paid your employees during the pandemic? Read on to learn more about qualified wages for the Employee Retention Credit.
What are qualified wages for the Employee Retention Credit?
The IRS defines qualified wages as wages and compensation “paid by an Eligible Employer to some or all of its employees” and includes “qualified health plan expenses that are properly allocable to the wages.”
Additionally, according to IRS website, “The credit is available to eligible employers that paid qualified wages to some or all employees after March 12, 2020, and before January 1, 2022. Eligibility and credit amount vary depending on when the business impacts occurred. The ERC is not available to individuals.”
What are qualified wages for the Employee Retention Credit in 2020?
As we mentioned above, eligibility for the Employee Retention Credit has changed since it was initially enacted under the Coronavirus Aid, Relief, and Economic Security Act (CARES). The good news is that the percentage of wages you can claim has risen.
A few quick notes to keep in mind:
- The CARES Act 2020 mandated that eligible employers could claim a refund against 50% of qualified wages, up to $10,000 per employee
- To be eligible, businesses had to be financially impacted by COVID-19 for wages paid between March 13, 202, and December 2021
- The full-time employee requirement for applying for the ERC was raised in 2021
Eligibility for the Employee Retention Credit
What makes a business eligible for the Employee Retention Credit?
Per the IRS, the requirements are different, depending on the time period for which you claim the credit. Generally, businesses and tax-exempt organizations, including churches and non-profits, that qualify are those that:
- Were shut down by a government order due to the COVID-19 pandemic during 2020 or the first three calendar quarters of 2021
or
- Experienced the required decline in gross receipts during the eligibility periods during 2020 or the first three calendar quarters of 2021
or
- Qualified as a recovery startup business for the third or fourth quarters of 2021
Are tips eligible for the Employee Retention Credit?
If you’re a restaurant owner with a sizable front-of-house staff or you have a robust bar staff, you know how important it is to provide your employees with ample tip-making opportunities.
This is good news for owners in these situations, as tips are reportable if the employee received more than $20 – anything under this amount wouldn’t qualify.
According to IRS Notice 2021-49, cash tips, which include credit card tips that are reportable for payroll tax, can qualify for Employee Retention Credit wages, as long as the business meets the other requirements.
Keep in mind, there are limitations on which tips can be counted toward these qualified wages, such as:
- Only tips that are reported to you as taxable income may be included in qualified wages. This means that any unreported or cash tips can’t be counted toward the ERC
- There are other considerations regarding cash tips, too. Only tips received by bartenders and waitstaff are eligible to be included in qualified wages. Any tips received by other employees (such as cooks or dishwashers) may not be counted toward the ERC
Do qualified wages qualify for the ERC?
When we talk about “qualified wages,” what does this mean?
This refers to wages paid by employers to employees while operations were fully or partially suspended by COVID-19 orders from the government. This generally means any wages subject to Federal Insurance Contributions Act (FICA) taxes.
The good news? These qualified wages also include the employer’s qualified health plan expenses that are properly allocable to the wages.
Under the ERC code, wages that are paid to the majority owners with greater than 50% direct or indirect ownership of the business do not typically qualify. But it’s always a good idea to consult with an ERC professional just in case.
Can you claim independent contractors under the Employee Retention Credit?
Unfortunately, independent contractors and 1099 employees do not count toward your potential tax refund.
The Employee Retention Credit is specifically designed for wages paid to employees only. Independent contractors are not considered eligible employees, so their wages do not qualify for the payroll tax credit. We’re looking for W-2 employees on payroll during the 2020 or 2021 tax years.
It’s easy to get started and see if you may be eligible for the Employee Retention Credit. We’ve helped thousands of eligible small-to-medium-sized businesses claim the refunds they qualify for.
Our network of independent tax attorneys will work to verify your claim and help you uncover credits your business is eligible to receive.
Plus, our highly trained team moves you quickly through this process, guiding you step-by-step in claiming your refund if your business is eligible. Let’s get started today.
*Innovation Refunds works with a team of independent tax professionals. We will share your information with these professionals to evaluate and process your claims. Innovation Refunds does not provide tax or legal advice. Terms & conditions apply.
