As businesses across the U.S. continue to claim the Employee Retention Tax Credit (ERC, or ERTC) on their amended 2020 and 2021 payroll tax returns, many employers are running into issues filling out the application correctly.
You must ensure that you understand how the ERTC applies to your business and whether you meet the specific definitions laid out by the IRS. Even if you don’t mean to, claiming the ERTC incorrectly could result in tax penalties and even tax evasion charges.
Here are a few challenges companies face when gathering ERTC employee data.
Denoting Small vs. Large Employers
The ERTC offers different benefits for “small” and “large” employers based on the number of employees a business has. As you’re compiling ERTC employee data, add up the average number of full-time employees employed during 2019 to determine where your business falls.
The threshold is different for the 2020 and 2021 tax years.
- For 2020 filing, the IRS considers employers with 100 or fewer full-time employees “small.”
- For 2021 filing, the IRS considers employers with 500 or fewer full-time employees “small.”
This distinction matters because small businesses can claim all wages paid to each employee in the qualifying tax year, while large businesses can only claim wages paid to employees who did not provide services due to pandemic shutdowns.
Distinguishing “Full-Time” vs. “Full-Time Equivalent” vs. “Part-Time” Employees
When calculating whether your business is small or large for ERTC purposes, you consider the average number of full-time employees. But what about “full-time equivalent” employees (FTEEs)?
FTEEs are pools of employees who individually are not considered full-time workers, but the total number of hours they work makes them collectively equivalent to full-time workers.
According to the IRS, for purposes of determining whether you are a small or large employer, you only need to count actual full-time employees — not FTEEs. This distinction could allow you to claim thousands of more dollars in tax credit money, depending on your business size and structure.
The definition of a full-time employee is someone who works either 30 hours a week or 130 hours per month.
Identifying Qualified Wages for Employees
The ERTC allows eligible employers to recover up to 50% of the qualified wages they paid employees in 2020, and 70% of the qualified wages paid in 2021. But your ERTC employee data must accurately calculate qualified wages and distinguish them from excluded payments.
Review these qualifiers when calculating eligible wages:
- The maximum amount of qualified wages you may claim per employee is $10,000.
- Qualified wages generally meet the definition of wages for FICA purposes under Section 3121(a).
- For “large” businesses, qualified wages do not include the wages you paid for pre-existing PTO days.
- For “large” businesses, eligible wages may not exceed what the employee would have earned during an equivalent duration during the 30-day period immediately preceding the period of significant decline.
- Payments made in connection to a former employee’s termination are not eligible wages.
- Payroll taxes and withholdings are not qualified wages.
- The IRS allows you to use any reasonable method to calculate eligible wages for an employee with an irregular schedule.
Because the 2020 and 2021 tax seasons have already passed, you will need to file Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund) to amend your previous tax returns for those seasons.
Need Help Evaluating ERTC Employee Data?
It takes time to adequately evaluate ERTC employee data and determine the exact amount of qualified wages to claim. That’s why many businesses are turning to experienced tax attorneys for help.
Do you need help claiming the ERTC? Contact Dayes Law Firm today at (800) 503-2000 for a free consultation.