Table of Contents:
If you’re reading this, odds are you’re considering filing for the Employee Retention Credit (ERC) – or looking to determine if you’re eligible. Keep reading, because we can help.
There are many complexities and moving parts to the ERC. But first, to understand how if your SMB may qualify for the ERC, you must first determine how many full-time employees (FTEs) or equivalent you have.
What is a full-time employee?
Since the ERC was designed to reward eligible employers for retaining employees during the COVID-19 pandemic, this refundable tax credit is claimed based on your employee headcount. More specifically, it’s based on the number of full-time employees you kept during specific calendar quarters in 2020 and 2021.
The simple answer is that a “full-time employee” (in the context of the ERC) is an employee who averages at least 30 hours of service per week – or 130 hours per calendar month.
Conveniently, this distinction has previously been addressed in another context, the Affordable Care Act under Section 4980H, which specifically deals with whether employers are considered “Applicable Large Employers” and are thus required to offer full-time employees minimal essential health coverage.
For the purposes of 4980H, the IRS defines large employers as “generally, employers who employed at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year.”
How is the ERC calculated?
Although the eligible periods and wage ceilings have changed over time, calculating the ERC is fairly simple:
- Eligible businesses can receive a refund of up to $5,000 per employee for all of 2020.
- For 2021, that figure is up to $7,000 per employee for each quarter for Q1 through Q3.
- Note that the credit for ERC 2021 is 70% of qualified wages paid per employee.
2020 and 2021 ERC criteria
So, what are the criteria for claiming the ERC? Luckily for many eligible businesses, the figure was expanded over time. In 2020, only businesses with less than 100 FTEs could claim the ERC. In 2021, all businesses with less than 500 FTEs could claim it.
- 2020: Your maximum full-time employee count on your payroll in 2019 was less than 100.
- 2021: Your maximum full-time employee count on your payroll in 2019 was less than 500.
How many hours is an ERC full-time employee or equivalent?
As we stated above, a full-time employee is defined as one that in any calendar month worked at least 30 hours per week or 130 hours in a month.
You might note that full-time equivalent employees are a group of employees who are not individually FTE, but when considered collectively, are equivalent to an FTE, based on the total number of hours worked in a month divided by 120.
How do I calculate my FTE employees for the ERC?
It can seem difficult to figure out how many employees you can count as “full-time.” But arriving at that figure takes only two steps.
- Make a list of all your employees and hours worked for full-time employees (at least 30 hours per week, or 130 hours per month).
- Take the sum of the number of FTEs in each month in 2019 and divide this number by 12.
Example FTE calculation
Let’s do an exercise. Here’s how you’ll calculate the ERC for your company:
First, we’ll assume that you’re eligible due to one of the guiding factors (loss of gross receipts, limited commerce, etc.) for only one (1) specific year, 2020. We’ll say that you had to partially shut down operations in Q2, Q3, and Q4 of that year.
Second, we’ll assume that you have 5 employees. We’ll also assume they make more than $10,000 a year in salary. Because these quarters were in 2020, you can claim up to 50% of up to $10,000 for each employee paid across all quarters. This means you can claim up to $5,000 per employee per year, totaling a maximum potential credit of $26,000. That’s a nice pickup!
Large employer definition under the ERC
So, how do we determine what a large employer is? Let’s reference the CARES Act, which established the ERC in the first place.
Per the CARES Act, whether a business is a small or large employer depends on whether the average number of full-time employees employed during 2019 exceeded the applicable threshold amount.
The threshold amount depends on the calendar year. The 2020 ERC threshold is 100 full-time employees, and the 2021 ERC threshold is 500 full-time employees.
Small employer definition under the ERC
Are you a small business? Or a large business? And does it matter? Well, yes actually.
As we established above, for purposes of determining whether you are a small or large employer, you can only count full-time employees. And those rules have changed since the ERC was established.
- For the 2020 ERC, an employer with 100 or fewer average full-time employees (as measured in 2019) is defined as a small employer.
- For the 2021 ERC, an employer with 500 or fewer full-time employees (as measured in 2019) is defined as a small employer.
Are you ready to determine your potential ERC eligibility? It’s easy to get started and see if you may qualify for ERC assistance. Our independent tax attorneys will help determine your business’ eligibility, and if you qualify, check for missing documentation, calculate your estimated refund, and submit your claim.
Let’s start now. Determine your business’ eligibility today.
*Innovation Refunds works with a team of independent tax professionals. We will share your information with these professionals to evaluate and process your claims. Innovation Refunds does not provide tax or legal advice. Terms & conditions apply.