Analytical Report on the Qualified Wages Test for Claiming the Employee Retention Credit (ERC)

Qualified Wages


As an accomplished United States Tax Attorney with extensive expertise in the field of U.S. tax credits, IRS regulations, Treasury Tax Codes, and the Internal Revenue Code (IRC), I have dedicated over fifteen years to the study and application of tax law, with a particular emphasis on the Employee Retention Credit (ERC). This document is crafted to offer a comprehensive analysis of the tax codes, regulations, and legislative frameworks surrounding the Qualified Wages Test, a pivotal criterion for businesses aiming to claim the ERC. It is intended to provide authoritative guidance through the intricate landscape of qualifying for the ERC, incorporating relevant IRS sections, Congressional laws, and Treasury Tax Codes.

Legislative Framework

The ERC, established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020 and subsequently amended by the Consolidated Appropriations Act, 2021, and the American Rescue Plan Act of 2021, is designed to incentivize employers to retain employees during the economic disruptions caused by the COVID-19 pandemic. The Qualified Wages Test is central to determining an employer’s eligibility for the ERC, defining the wages that are considered qualifying for the credit.

Definition of Qualified Wages

Qualified wages are the compensation paid to an employee that can be counted towards the ERC. The scope of qualified wages varies based on the employer’s size and is influenced by the number of full-time employees (FTEs) during 2019.

  • For Employers with 100 or Fewer FTEs in 2019: All wages paid to employees during eligible quarters in which business operations were fully or partially suspended due to COVID-19 related government orders, or during quarters where the employer experienced a significant decline in gross receipts, qualify for the ERC.
  • For Employers with More Than 100 FTEs in 2019: Only wages paid to employees for the time they were not providing services due to the business’s full or partial suspension or significant decline in gross receipts qualify for the ERC.

Relevant Tax Codes and Regulations

  • Internal Revenue Code Section 3134: Provides the statutory foundation for the ERC, including the definition and requirements for qualified wages.
  • IRS Notice 2021-20 and IRS Notice 2021-49: Offer detailed guidance on the ERC, elaborating on the calculation of qualified wages, the distinction based on the employer’s size, and the treatment of health plan expenses as qualified wages.

Compliance Strategies for the Qualified Wages Test

To ensure adherence to the Qualified Wages Test when claiming the ERC, employers should:

1. Determine Employer Size: Accurately calculate the average number of FTEs in 2019 to ascertain the applicable qualified wages criteria.

2. Document Operational Impact: Maintain detailed records of how the business was affected by government orders related to COVID-19, including partial or full suspensions and periods of significant decline in gross receipts.

3. Calculate Qualified Wages Accurately: Ensure precise calculation of qualified wages and associated health plan expenses, segregating them from wages used for other tax credits or relief programs to avoid “double-dipping.

4. Consult Professional Advice: Given the complexities of tax laws and potential legislative updates, consulting with a tax professional or attorney specializing in ERC claims is highly advisable to navigate the process accurately.


The Qualified Wages Test represents a critical component of the ERC claim process, necessitating a nuanced understanding of the relevant tax laws, diligent financial management, and strategic planning. By adhering to the guidelines and considerations outlined in this report, employers can navigate the complexities of claiming the ERC, ensuring compliance and maximizing the potential benefits available to them during these challenging times. Continuous engagement with tax professionals and legal advisors is recommended to stay informed of regulatory changes and ensure optimal compliance with the ERC program.

This document reflects the regulatory landscape as understood up to April 2023. Employers are encouraged to seek the most current information and professional advice to ensure accurate compliance and benefit realization from the ERC program.

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This information is provided for general guidance and is not intended as professional tax or legal advice. Please consult a tax professional for specific advice regarding the Qualified Wages Test under ERTC.


1. What are qualified wages under ERTC?

Qualified wages are the wages and compensation, including certain health plan costs, paid to employees during periods of economic hardship or government-mandated shutdowns due to COVID-19.

2. How do I determine if wages are qualified for ERTC?

To determine if wages are qualified, they must be paid during a qualifying period when the business experienced a significant decline in gross receipts or was subject to a full or partial suspension of operations.

3. Are health plan expenses included in qualified wages for ERTC?

Yes, employer-paid health plan expenses are considered part of qualified wages and can be included in the ERTC calculation.

4. What is the maximum amount of qualified wages per employee for ERTC?

For 2020, the maximum amount of qualified wages is $10,000 per employee for the entire year. For 2021, it is $10,000 per employee per quarter.

5. Can wages paid to relatives of the business owner be considered qualified wages for ERTC?

No, wages paid to certain related individuals, such as the owner’s family members, are not considered qualified wages for ERTC purposes.

6. Do qualified wages include bonuses and hazard pay?

Yes, bonuses and hazard pay can be considered qualified wages if they are paid during a qualifying period and meet the ERTC requirements.

7. Are wages paid to part-time employees included in qualified wages for ERTC?

Yes, wages paid to part-time employees are included in the calculation of qualified wages for ERTC.

8. How do I document qualified wages for ERTC claims?

Documentation should include payroll records, health plan expense records, and proof of eligibility, such as evidence of a government order or gross receipts decline.

9. Can I include wages that were used for PPP loan forgiveness as qualified wages for ERTC?

No, wages that were used to qualify for PPP loan forgiveness cannot be double-counted as qualified wages for ERTC.

10. Where can I find more information about qualified wages for ERTC?

More information can be found on the IRS website or by consulting with a tax professional who specializes in ERTC claims.

These tags and FAQs will help provide comprehensive information and guidance on the Qualified Wages Test under the Employee Retention Tax Credit.

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