How Can Businesses Segregate Qualified Wages for the ERTC? 

October 25, 2023
Dayes Law Firm

With up to $26,000 of available funds per employee available as a tax credit, tracking which wages qualify is important to ensure small businesses can claim maximum refunds while complying with IRS regulations. Here is more about which wages qualify for the Employee Retention Tax Credit (ERTC) as well as helpful tips to maintain careful records. 

About the Employee Retention Tax Credit 

The ERTC is a tax credit in the form of a refund given to small business owners who experienced a significant disruption in 2020 and 2021 as a result of the COVID-19 pandemic. There are two ways companies can demonstrate that their businesses were disrupted: 

  1. A decline in revenue of 50% in 2020 and 20% in 2021 compared to the same quarter in 2019, or
  2. A full or partial suspension of operations due to the government-mandated closures 

You may also see the ERTC referred to as the Employee Retention Credit (ERC), and it’s the same thing as the ERTC. 

Which Wages Qualify for the ERTC? 

Determining which wages qualify for the ERTC can get complicated, which is why many small business owners choose to consult with ERTC attorneys to ensure everything is above board. 

There are two key steps to determining qualifying wages: 

  1. Understanding whether your business is considered a “small employer” or a “large employer,” and
  2. Identifying which wages qualify for each of these business classifications. 

For ERTC purposes, small employers are those with 100 or fewer full-time employees in 2019. This number, by the way, is calculated as an average for the year. Small employers are allowed to qualify all paid wages, including health plan expenses, vacation pay, sick leave, and other forms of compensation. 

Large employers, by contrast, are those with more than 100 full-time employees. They can only claim qualified wages for hours that employees were paid when they were not working. For example, if a business continued to pay wages for 40 hours per week while the employee only worked 30 hours, only the wages paid for the 10 non-working hours would be eligible. 

Wages That Are Not Eligible Under the ERTC 

It’s vital that eligible employers exclude wages that do not qualify for the refund, such as:

  • Payroll taxes and withholdings. This includes what is withheld from their paycheck due to federal income tax, Social Security taxes, and Medicare taxes. 
  • Some severance payments. The timing of the severance payment is critical, as a severance issued to a current employee qualifies. 
  • Other wages related to payroll credits. Wages paid under the Families First Coronavirus Response Act (FFCRA) are not eligible. The same goes for wages paid for family leave or the Work Opportunity Tax Credit. 

How to Track and Segregate Qualified Wages 

Keeping track of which wages qualify under the ERTC program can help you maximize the amount of your refund by ensuring you claim all of the wages for which you qualify. Careful record-keeping also provides that you do not claim more than what your business qualifies for, which can result in delays, audits, and penalties. 

To keep track of qualified wages: 

  • Identify the quarters for which you qualify for the ERTC. 
  • Keep careful records to be able to track what you are claiming and why the wages are qualified. 
  • Maintain separate payroll accounts and designate specific categories in your accounting system to denote which wages qualify for ERTC. 
  • Document any changes to employee status or changes in rules that may be implemented retroactively. 

Contact Dayes Law Firm for a Free Consultation 

At Dayes Law Firm, we have helped businesses file $250 million in ERTC claims thus far. To find out how much your business may qualify for, call us at 866-257-1223 or contact us online.