Understanding Eligible Wages for the Employee Retention Credit (ERC)
The Employee Retention Credit (ERC) is a tax credit offered by the IRS to assist small businesses in retaining their employees during challenging economic conditions, such as those caused by the COVID-19 pandemic. Eligible businesses can claim the ERC on their payroll tax returns, but it’s important to understand which wages qualify for the credit.
In this article, we’ll explore the types of wages that qualify for the ERC and how businesses can determine their eligibility for the credit.
The ERC is based on the wages paid to employees during a designated period, which can vary depending on the specific eligibility requirements that apply to the business. For example, if the business experienced a decline in gross receipts, the eligible period would be the calendar quarter in which the decline occurred, and subsequent quarters until the business recovers to a certain level of gross receipts.
To qualify for the ERC, wages must be paid to employees who were not providing services during the designated period. This means that employees who were furloughed or had their hours reduced due to the pandemic are likely eligible for the credit. Additionally, wages paid to employees who continued to work during the period can also qualify, depending on the size of the business and other eligibility requirements.
You may like to check the ERC FAQ.
For businesses with 500 or fewer employees, all wages paid during the designated period are eligible, regardless of whether the employee worked during the period. For businesses with more than 500 employees, only wages paid to employees who were not providing services during the period are eligible.
It’s important to note that wages paid with Paycheck Protection Program (PPP) loan proceeds are not eligible for the ERC. However, wages paid with other funds, such as revenues or other loan proceeds, can be considered eligible.
The ERC is equal to 50% of eligible wages paid to each employee, up to a maximum of $10,000 per employee for all quarters combined. This means that the maximum credit per employee is $5,000.
Must check the ERC Questions to understand it better!
To claim the ERC, businesses will need to complete Form 941, the employer’s quarterly payroll tax return, and include the applicable amount of the credit on that return. If the ERC exceeds the amount of payroll taxes owed, the excess credit will be refunded to the business.
In conclusion, understanding eligible wages for the Employee Retention Credit is key for small businesses to take advantage of this valuable resource during challenging economic times. By understanding which wages qualify for the credit, businesses can determine their eligibility and potential credit amount, and take steps to retain their employees and navigate these challenging times.