Don’t Sell Yourself Short on the ERC – Reevaluate Your Small Employer Status
April 6, 2021
At a Glance:
- Rethinking ERC Employer Status: Evidence suggests that ERC-eligible employers do not need to use full-time equivalent calculations to determine 2019 employee counts.
- Impact on Your Business: Excluding all part-time employees could shift a business’s classification from a large employer to a small employer, potentially resulting in significantly larger credits.
- Next Steps: The wrong calculation method could severely undercut your ERC, so you need to make sure you’re choosing the best strategy to maximize your credit value.
The full story
Eligibility aside, the size of your workforce is one of the most influential factors driving the ultimate value of your Employee Retention Credit (ERC). There’s been some debate over the correct method for classifying and counting full-time employees when evaluating large or small employer status.
Lack of specificity in the legislation leaves the door open to the position that a business’s number of full-time employees does not include full-time equivalents. This position would allow businesses to exclude all part-time employees from the final headcount, potentially bumping some large employers to a small employer classification and significantly impacting credit values.
Understanding the significance of large vs. small employers
While Congress designed the ERC to help all businesses keep more employees on payroll during the pandemic, the legislation includes particular advantages for small employers. Employer size designation is based on the average number of full-time employees in 2019, and the difference in benefit varies for 2020 and 2021:
|Businesses with 100 or fewer full-time employees in 2019 are considered “small employers” and can claim the credit for qualified wages paid to any employeeduring the qualifying period.||Businesses with 500 or fewer full-time employees in 2019 are considered “small employers” and can claim the credit for qualified wages paid to any employee during the qualifying period.|
|Businesses with more than 100 full-time employees in 2019 are considered “large employers” and can only claim the credit for qualified wages paid to employees who are not providing services.||Businesses with more than 500 full-time employees in 2019 are considered “large employers” and can only claim the credit for qualified wages paid to employees who are not providing services.|
The difference in including qualified wages paid to all employees instead of only some employees can substantially impact credit size, essentially making the credit far more valuable per employee for small employers and, therefore, putting additional importance on classifying and counting full-time employees.
The legislation leaves room to debate the definition of a full-time employee
The CARES Act states that a full-time employee for the ERC should be defined in the same way as provided in IRC § 4980H. This section defines a full-time employee as any employee who works an average of either 30 hours or more per week, or 130 hours per month.
The big question among businesses and tax advisors is whether this definition requires businesses to include full-time equivalents when counting employees for the ERC.
Neither the CARES Act nor the most recent ERC FAQs from the IRS reference full-time equivalents, but there is some concern that Congress may have intended for the ERC to include full-time equivalents. This concern is largely based on a report from the CARES Act Joint Committee on Taxation that states qualified wages for the ERC should be based on the average number of full-time and full-time equivalent employees during 2019.
There is also a subsection of § 4980H that requires the inclusion of full-time equivalents when determining large employer status. However, the language explicitly states that this inclusion applies only to that particular section in the IRC. Notably, the CARES Act does not directly reference this subsection, nor does it tie that requirement to the ERC in any way.
The bottom line
The only way to accurately calculate a tax credit like the ERC is to follow the legislation exactly as written. So, barring further guidance or clarification, lack of reference to full-time equivalent employees in either the CARES Act or the IRS FAQs makes the position to disclude full-time equivalents highly defendable — and potentially hugely beneficial to some employers.
You need the right strategy to fully maximize your ERC benefit, and the position to disclude full-time equivalent employees is an important strategy to evaluate. Don’t undermine your potential credit! Aprio’s dedicated ERC team is always up-to-date on the latest guidance, and we can confidently help you make the best determination for your business.
Disclaimer for services provided relative to SBA programs and the CARES Act
Aprio’s goal is to provide the most up to date information, along with our insights and current understanding of these programs and regulations to help you navigate your business response to COVID-19.
The rules regarding SBA programs are constantly being refined and clarified by the SBA and other agencies In certain instances, the guidance being provided by the agencies and/or the financial institutions is in direct conflict with other competing guidance, regulations and/or existing laws.
Due to the evolving nature of the situation and the lack of final published rules, Aprio cannot guarantee that additional changes or updates won’t be needed or forthcoming and the original advice given by Aprio may be affected by the evolving nature of the situation.
You need to evaluate and draw your own conclusions and determine your Company’s best approach relative to participation within these programs based on your Company’s specific circumstances, cash flow forecast and business strategy.
In situations where resources are provided by third parties, those services should be covered under a separate agreement directly with that service provider. Aprio is not responsible for the actions of any other third party.
Aprio encourages you to contact your legal counsel to address the legal implications of the impact of the CARES Act and specifically your participation in any of the SBA programs.
About the Author
Justin Elanjian, CPA, is the Partner-in-Charge of Aprio’s Paycheck Protection Program (PPP) & Employee Retention Credit (ERC) Services. As a national PPP expert, prominent speaker and strategic business advisor, Justin helps both lenders and borrowers navigate the complexities of the PPP. He also helps his clients realize benefits from other stimulus package programs, such as the ERC, and is committed to strengthening his clients’ balance sheets and helping them achieve what’s next. Justin also leads a team of more than 50 professionals who share his passion for helping businesses maximize the federal COVID relief programs.