Which Wages Qualify For the ERC Tax Credit?

Good news: it’s not too late to claim your Employee Retention Credit (ERC) in 2023! The statute of limitations period to review credit claimed on your tax return is three years.

One of the most common questions we get about the ERC is which wages qualify for the credit. Here’s a quick overview.

WHICH WAGES QUALIFY FOR THE ERC?

Small employers (100 or fewer full-time employees in 2020 and 500 or fewer full-time employees in 2021) can count wages paid to nearly all employees. An exception is wages paid to majority owners and their family members. 

Large employers can count wages paid to employees who were not working (including health plan expenses). In addition, large employers can claim credit for wages paid to all employees (except majority owners and their family members) in 2021 if they were severely financially distressed.

Qualified wages include:

• Salary or hourly wages. 
• Health plan expenses paid on the employee’s behalf if they were excluded from their gross income.

For Q2 through Q4 in 2020, employers can receive up to 50% of qualified wages, with credit capped at $5,000 per employee for the year. For 2021, employers can receive up to 70% of qualified wages, with credit capped at $10,000 per employee for the full year and $7,000 per employee per quarter.

WAGES THAT DO NOT QUALIFY FOR THE ERC

MAJORITY BUSINESS OWNERS’ WAGES

If you and/or your family members own 51% of the business or more, your wages do not qualify for the ERC credit. On the other hand, if you own only 50% of the business or less and do not collectively own the majority of the business with other family members, your wages can qualify for the ERC.

If any employees have one of these relationships to a majority owner (or constructive majority owners) of a company, their wages do not qualify for the ERC:

• A child or a descendant of a child.
• A brother, sister, stepbrother, or stepsister.
• The father or mother, or an ancestor of either.
• A stepfather or stepmother.
• A niece or nephew.
• An aunt or uncle.
• A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
• An individual who, for the taxable year of the taxpayer, has the same principal place of residence as the taxpayer and is a member of the taxpayer’s household.

For example, let’s say a father and daughter each own 50% of a business. Since these business partners are related and own over 51% of the business between their combined ownership, they are considered constructive majority owners. Their wages do not qualify for the ERC. If the daughter also has a niece and a brother-in-law who work for the company, their wages do not qualify for the ERC either.

As another example, let’s say a brother and sister each own a 20% share of a business. None of the other partners are related to them. Since neither of them owns more than half the business, and their combined share is less than 51% of the business, their wages qualify for the ERC.

Keep in mind that entities are considered a single employer for ERC purposes if they are under common control applying rules, like a parent-subsidiary or brother-sister controlled group.

FIND OUT IF YOU QUALIFY FOR THE ERC

LG Resources ERC tax credit specialists can help you determine your eligibility for the ERC and maximize the amount of credit you receive. Our team is dedicated to the ERC, which is why our clients get an average of 10-20% more ERC money than a CPA not familiar with the program. We also offer faster results and audit protection.

There’s so much you can do with your ERC money, from rewarding top employees to launching a new product. Contact us today to see if you qualify.