Wages/compensation, in general, that are subject to FICA taxes, as well as qualified health expenses qualify when calculating the employee retention credit. These must have been paid after March 12, 2020 and qualify for the credit if paid through Sept. 30, 2021 (Recovery Startup Businesses have until Dec. 31, 2021).
When determining the qualified health expenses, the IRS has multiple ways of calculating depending on circumstances. Generally, they include the employer and employee pretax portion and not any after-tax amounts.
When determining the qualified wages that can be included, an employer must first determine the number of full-time employees.
For the purposes of the employee retention credit, a full-time employee is defined as one that in any calendar month in 2019 worked at least 30 hours per week or 130 hours in a month (this is the monthly equivalent of 30 hours per week) and the definition based on the employer shared responsibility provision in the ACA.
- Employers who were in business the entire calendar year in 2019 or 2020 would take the sum of the number of full-time employees in each calendar month and divide by 12.
- An employer who started a business during 2019 or 2020 determines the number of full-time employees by taking the sum of the number of full-time employees in each full calendar month in 2019 or 2020 in which the business operated and divide by that number of months.
- An employer who started a business in 2021 determines the number of full-time employees by taking the sum of the number of full-time employees in each full calendar month in 2021 that the business operated and divides by that number of months.
Note: The employee calculation of full-time equivalent (FTE) used for the forgiveness report is not calculated the same way as a full-time employee for the employee retention credit. If you are an accounting professional, do not provide your clients with the FTE information. Also, remember that if a client has taken and will be forgiven for a loan, they may now be eligible for the employee retention credit on certain wages.
CARES Act – 2020
Those who have more than 100 full-time employees can only use the qualified wages of employees not providing services because of suspension or decline in business. Furthermore, any wages paid for vacation, sick or other days off based on the employer’s current policy cannot be included in qualified wages for the larger employers. Basically, employers can only use this credit on employees who are not working.
Employers with 100 or fewer full-time employees can use all employee wages — those working, as well as any time paid not being at work with the exception of paid leave provided under the Families First Coronavirus Response Act.
Consolidated Appropriations Act – 2021
This law increased the employee limit to 500 for determining which wages are applicable for the credit.
American Rescue Plan Act – 2021
This law allows certain hardest-hit businesses — severely financially distressed employers — to claim the credit against all employee’s qualified wages instead of just those who are not providing services. These hardest hit businesses are defined as employers whose gross receipts in the quarter are less than 10% of what they were in a comparable quarter in 2019 or 2020. This only applies to the third quarter of 2021 for businesses that aren’t Recovery Startup Businesses.
The IRS does have guardrails in place to prevent wage increases that would count toward the credit once the employer is eligible for the employee retention credit.