How Do Employee Compensation Models Impact ERTC Calculations?

November 25, 2023
Dayes Law Firm

Many employers want to take advantage of the Employee Retention Tax Credit (ERTC). Calculating qualified wages is a key part of that process — but how much you can actually claim depends on your compensation model.

If you’re an eligible business, how large of a refund can you claim through the ERTC? How have compensation models changed, and how might that affect your ERTC calculations? Dayes Law Firm offers ERTC business guidance. This can help you learn more about how compensation models may affect the ERTC credit.

What Are Employee Compensation Models?

As an employer, you compensate your employees for the work they do with wages and other benefits. A compensation model aims to take into account these salary structures, performance management, and additional benefits to compensate employees.

Compensation models often include a combination of three components:

  • Direct Compensation: This is any money that employees receive for their work, including paychecks and bonuses.
  • Indirect Compensation: These are employee benefits and include things such as health and dental insurance.
  • Other Benefits: These can include retirement savings plans, stock options, and performance-based equity.

A fair model uses compensation benchmarking — that is, comparing the current job offering to similar options in the market — to determine a fair salary. Proper planning and compensation management take into account both short- and long-term incentives and potential challenges.

Compensation models have changed over the years, with more companies offering non-financial compensation as incentives. In addition, compensation may include a combination of a standard salary and tips, bonuses, and other perks like paid vacation days.

What Is the ERTC?

The COVID-19 pandemic affected countless businesses. The government introduced the Employee Retention Tax Credit to reimburse employers for a percentage of qualified wages paid to encourage them to retain their employees.

An eligible employer will meet one of the following criteria:

  • They experienced a partial or full suspension of operations during the pandemic due to governmental orders.
  • Their gross receipts declined by more than 50% in 2020 or 20% in the first three quarters of 2021.

Eligible employers can claim up to 50% of qualified wages for each eligible employee they retained during 2020; in 2021, that percentage rose to 70%.

How Compensation Models Affect ERTC Claims

These calculations can sometimes seem confusing, so it’s beneficial to work with a professional for ERTC business guidance.

By taking advantage of the ERTC, you can gain significant financial aid, allowing you to invest the money into your business. However, if you plan on claiming the credit, you must first determine which employees are eligible — and how much of their wages you can claim.

Your compensation model has a direct impact on how many wages you can claim. Generally, eligible wages include any cash payments you made to the employee, including salaries, tips, and bonuses. In addition, you can include any group healthcare expenses in your ERTC application.

Calculating qualified wages ultimately depends on your current compensation model. For example, if you use a combination of tips and base salaries, you’ll need to take both into account for the credit. In addition, you’ll need to base your calculations on your compensation model from 2020 and 2021, not the current year.

Reach Out To Dayes Law Firm for Help Filing Your ERTC Application

Trying to calculate qualified wages for the ERTC can be challenging. Dayes Law Firm is here to offer ERTC business guidance. We can help you determine what wages qualify for the credit, help you file the claim, and otherwise assist you. Call 800-503-2000 to request your consultation.