The Employee Retention Credit is among the most lucrative tax credits a small business owner can attain in 2023. However, navigating these refunds can be complicated.
You can claim a credit for 50% of the first $10,000 in wages that qualify that you paid each employee during 2020. For 2021 you can claim 70% of each employee’s refundable tax credits per employee between the two years.
Your ERC amount is calculated by determining which wages qualify under the credit. This primarily depends on the number of full-time employees that were on payroll during the 2019 calendar year.
If you had less than 100 employees on average in 2019, then you can treat the wages paid to all your employees as qualified in 2020. If you exceeded that amount, only the wages you paid to employees not providing services qualify for the ERC that year.
For 2021 the maximum number of employees increased to 500. But you still base this number off of your 2019 employee count.
To simplify, if you had less than 500 people on payroll in 2019 then all of your wages are qualified for 2021. If not, then only the wages you paid to your inactive employees qualify for the credit.
When calculating your total wages paid you can also add in your group health plan expenses. This includes both what you contributed as the employer as well as any pre-tax salary reductions that were contributed by the employees.