The Employee Retention Credit (ERC) is a valuable tax credit for employers who have been affected by the COVID-19 pandemic. The credit is based on total qualified salaries, including health plan expenses paid by the employer to the employee. It is calculated quarterly and is equivalent to 50 percent of the “qualifying salary” of each employee of an eligible employer. To determine the number of full-time employees, employers must first calculate the total qualified salaries.
Qualified wages are calculated without regard to federal taxes imposed or withheld, including the employee or employer's share of social security taxes, the employee and employer's share of Medicare taxes, and the federal income taxes that must be withheld. For employers with 100 or fewer full-time employees, all salaries of employees who work, as well as any paid time that they are not working, can be counted for the ERC, with the exception of paid vacation provided under the Families First Coronavirus Response Act. For employers with more than 100 full-time employees, only salaries paid to employees who cannot provide services due to the COVID-19 Order or due to a significant decrease in gross income can be counted for the ERC. In addition, if an eligible employer is an entity other than a corporation, then a related person is any person who maintains a relationship described above with a person who owns, directly or indirectly, more than 50 percent of the entity's equity and profits. For administrative staff whose hours were reduced by 40 percent but who are paid 100 percent of the normal wage, employers can treat 40 percent of the salary paid for the time these employees don't provide services as qualifying wages for the purposes of the employee retention credit.
Similarly, for employees who are not providing services due to the closure of their branch office but who receive 50 percent of their normal hourly wage, employers may treat the wages paid as qualifying wages for the purposes of the employee retention credit. The ERC calculation is an important tool for employers to understand in order to maximize their tax savings. By understanding how to calculate full-time employees and qualifying wages for the ERC, employers can ensure they are taking full advantage of this valuable tax credit.