Specifications of ERTC Qualified Wages for Businesses

July 28, 2023
Dayes Law Firm

The Employee Retention Tax Credit (ERTC) allows eligible employers to collect a refundable tax credit amount of up to $26,000 per employee. However, to calculate this tax credit correctly, you need to know what counts as ERTC qualified wages paid to your employees. Any mistakes or discrepancies on your ERTC application could potentially trigger an IRS audit and lead to major penalties for your business. 

So which wages fall under the definition of “qualified wages” for ERTC purposes?

ERTC Qualified Wages: A Definition

In broad terms, “qualified wages” for ERTC purposes are payments you issued to your workers while your business operations stopped or underwent partial suspension and/or while your business suffered a decline in gross receipts because of pandemic-related government restrictions. Qualified wages include salaries, hourly wages, group insurance payments, paid vacations, and certain health plans. 

Please note that you can only collect reimbursement for qualified wages through ERTC if you haven’t already claimed another benefit, like PPP loan forgiveness, on the same wages.  

Maximum ERTC per Employee: 2020 and 2021

For the tax year 2020, you may claim a maximum ERTC of $10,000 per employee at a rate of 50%, or $5,000 per employee for the entire year. For 2021, the limit is significantly higher: $10,000 per employee per quarter, with a rate of 70%, or a total of $7000 per quarter. Since only Q1, Q2, and Q3 of 2021 are eligible for ERTC, the credit amount caps at $21,000 per eligible employee. 

In total, you could potentially claim up to $26,000 per employee.

ERTC and the Number of Full-Time Employees

Your Form 941-X must specify the number of your full-time employees. A full-time employee is anyone who worked 30 hours per week or 130 hours per month in your company during the relevant period.

The definition of “small employer” vs. “large employer” for ERTC purposes differs between 2020 and 2021. If you’re claiming ERTC for 2020, and your company had over 100 full-time employees in 2019, you count as a “large employer” and can only claim ERTC for employees who didn’t provide any services during the credit period. Meanwhile, if you had 100 or fewer employees, you could potentially claim the credit on all employees’ wages. For 2021, the “large employer” threshold increased to 500 employees. 

Calculating ERTC: An Example

Let’s say you’re calculating ERTC qualified wages for Q1 of 2021. You’re a small business with three employees who received the following qualified wages for that quarter:

  • Employee #1: $6,000
  • Employee #2: $8,000
  • Employee #3: $12,000

In addition, you also paid health insurance premiums of $1000 per employee. 

Your overall credit per employee would be:

  • Employee #1: ($6,000+$1,000)X70% = $4,900
  • Employee #2: ($8,000+$1,000)X70% = $6,300
  • Employee #3: $10,000X70% = $7,000

In total, you could claim $18,200 for all three employees for this quarter. Note that Employee #3 maxes out the available credit threshold. 

ERTC in Family Businesses

How would ERTC work in a family business? Employee wages don’t count toward ERC if the employee is related to more than 50% of the owners. 

For instance, let’s say Tom and Mary own a painting business and employ, among other workers, their two adult children. In this case, Tom and Mary can’t include their children’s wages in the ERTC calculation since their children are related to 100% of the company’s owners. 

Dayes Law Firm: Reliable Help With Your ERTC Application

Are you preparing to claim your ERTC tax benefit? Contact the Dayes Law Firm PC for fast, reliable legal guidance and help handling your application. Our experienced tax lawyers will make sure your claim only includes ERTC qualified wages and complies with other IRS requirements.

Call 800-503-2000 to schedule a free consultation today.