Qualified Wages: What Counts for the Employee Retention Credit (ERC) and How To Report Them

The Employee Retention Credit (ERC) is a valuable tax credit that was introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help businesses retain their employees during the COVID-19 pandemic. One of the key factors in determining the amount of the credit is the qualified wages paid to eligible employees. In this blog post, we will explore what counts as qualified wages for the ERC and how to report them.

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What are Qualified Wages?

Qualified wages are the wages paid to eligible employees that can be used to calculate the ERC. These wages include both cash compensation and certain qualified health plan expenses. However, it is important to note that there are certain limitations and exclusions when it comes to qualified wages.

Cash Compensation

Cash compensation includes wages, salaries, tips, and other taxable compensation paid to employees. This includes both full-time and part-time employees. However, the amount of cash compensation that can be considered as qualified wages is limited to $10,000 per employee per calendar quarter.

Qualified Health Plan Expenses

In addition to cash compensation, qualified health plan expenses can also be considered as qualified wages for the ERC. This includes both the employer's share of health insurance premiums and the amount of health plan expenses paid by the employee with pre-tax salary reduction contributions. However, these expenses are only eligible for the credit if they are not already taken into account for the Families First Coronavirus Response Act (FFCRA) paid leave credits or for the employer's deduction for health plan expenses.

How to Report Qualified Wages?

Reporting qualified wages for the ERC is done through the employer's quarterly federal tax return, Form 941. The credit is reported on Line 11c of Form 941 for the applicable calendar quarter. It is important to accurately report the qualified wages to ensure that you receive the maximum credit amount.

Keep Detailed Records

To properly report qualified wages, it is essential to maintain detailed records. This includes records of the number of eligible employees, the amount of qualified wages paid to each employee, and any supporting documentation related to health plan expenses. These records will be crucial in case of an audit or if the IRS has any questions regarding your claim for the ERC.

Consult with a Tax Professional

While reporting qualified wages for the ERC may seem straightforward, it is always a good idea to consult with a tax professional to ensure compliance with all the requirements and to maximize your credit. They can provide guidance on how to properly calculate and report qualified wages, as well as help you navigate any complexities that may arise.

In Conclusion

The Employee Retention Credit is a valuable tax credit that can help businesses offset the financial impact of the COVID-19 pandemic. Understanding what counts as qualified wages and how to report them is crucial to ensure that you receive the maximum credit amount. By keeping detailed records and consulting with a tax professional, you can take full advantage of this credit and support your business during these challenging times.