Does Size Matter? For ERC Credit, It Can Mean a Big Difference
Are you a small or large employer? How do you know? Who sets the standards? And how does that impact how you think about the CARES act? And, specifically, the Employee Retention Credit (ERC) that could just net you $26,000 per W-2 employee you kept on during the pandemic?
Well, the answers to these questions are not always easy. Like any government or IRS program, the instructions can be less than straightforward, often requiring outside advice. And with the CARES Act/ERC Program, the details have developed and evolved over time.
The ERC program was created as a part of the federal government’s CARES Act, a response to the business and financial stresses caused by the COVID-19 reaction. Large and small companies were and continue to be treated differently under the emergency response law, and navigating the changes is not always easy.
For example, the definition of a large company for the program is different for 2021 than it was in 2020. Businesses averaging 100 employees in 2020 were considered “large,” while in 2021, the number went up to 500 full-time employees.
Exactly how those employees are counted is very specific and requires appropriate documentation, as noted in the step-by-step instructions in IRS Notice 2021-20 Q/A 31.
How do we count it?
According to the ERC instructions provided by the IRS, small businesses are those with fewer than 100 average employees in 2020 and 500 full-timers in 2021.
This is the formula to help determine the average full-time number of employees for comparison across 2019, 2020, and 2021:
“The term “full-time employee” means an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month (130 hours of service in a month is treated as the monthly equivalent of at least 30 hours of service per week), as determined in accordance with section 4980H of the Internal Revenue Code. An employer that operated its business for the entire 2019 calendar year determines the number of its full-time employees by taking the sum of the number of full-time employees in each calendar month in 2019 and dividing that number by 12.”
Clearly, the number of employees is not linked to specific people as much as to slots or headcount maintained throughout the pandemic. At the same time,e a business was forced to close or limit hours/availability due to COVID-19 safety restrictions. Since the ERC was designed to incentivize businesses to keep people on their payroll during the COVID-19 crisis, eligibility is directly related to the number of employees maintained during the pandemic.
Big or Small: Why it Matters
Because of the way businesses are assessed and the impact of the pandemic on different types of businesses of various sizes, for ERC eligibility consideration, small businesses or employers with fewer workers can receive credit based on all wages paid, whether the employees worked or not. Large employers can only consider wages paid to their people while they were not working.
In short, for small employers, all wages may be eligible for the ERC credit. In contrast, for large businesses, only wages paid while those employees are not providing a service are considered for the ERC credit.
The Affordable Care Act Curveball
Much of the confusion with this issue comes from the fact that figuring the number of employees is also required for the Affordable Care Act (ACA) but figured using a different method.
It is the difference between “full-time employees” and “full-time equivalent” employees allowed under the rules of the ACA. The ACA calculation method does NOT apply to the ERC. Instead, employers should use the formula outlined above to determine their eligibility based on employer size.
In short, it can get sticky without experience navigating these rules.
To help determine your company’s eligibility, engage a team deeply familiar with the IRS process. We regularly hear from clients that their in-house tax experts or contract CPA firms recommend working with ERC Specialists rather than attempting to handle their applications in-house because the details are so complex.
We’ve been focused on this specific program since it was passed as a part of the CARES Act. As a result, we have navigated various business situations and have as much experience – and success – as anyone else in the industry. Choose the experts at ERC Specialists to ensure your employee count is calculated correctly for an accurate ERC claim.