How Do Businesses Claim ERTC for Employees on Commission?

While the Employee Retention Tax Credit is a source of relief for many businesses, it is also a source of confusion.

For example, some wonder how the ERTC filing process changes when considering different types of employees, such as those working on commission. Can you file the ERTC for commission-based employees? How does it impact your qualified wages?

At Dayes Law Firm, we can help you navigate the challenges of filing the ERTC for employees working on commission.

What Is the ERTC?

The Employee Retention Tax Credit is a COVID relief measure for businesses that lost money during 2020 and 2021. It rewards businesses that kept employees on its payroll by compensating them for a percentage of wages paid to employees during qualifying quarters.

Your business may qualify for the ERTC if it:

Saw a significant decline in gross receipts, or
Experienced a partial or full shutdown due to a government mandate

If your business qualifies for the ERTC, you may file Form 941-X to claim it retroactively.

Who Qualifies as a Commission-Based Employee?

Commission-based employees earn part of their wages through specific services, tasks, or negotiations. For example, retail workers may earn a commission for items they sell to customers.

A commission-based employee may receive all or a portion of their earnings based on their performance rather than a previously set salary. Commission usually does not come with benefits, and employees must file taxes for commission differently than standard income. As the employer, you must provide them with Form T2200 (Declaration of Conditions of Employment).

Types of Commission-Based Employees

There are several categories of commission-based employees, including:

Commission and base salary: These employees have a base salary but can earn additional income through commission.
Commission-only: All income for these employees is based on commission.
Team-based commission: A commission is split among a group of employees equally to incentivize teamwork.

As the employer, you can choose whether you want to withhold your commission-based employees’ taxes or whether they can file as self-employed independent contractors.

ERTC Filing Challenges for Commission-Based Employees

When filing the ERTC for commission-based employees, you could face unique challenges.

Determining Qualified Wages

You might wonder whether you can claim the commission you paid employees for the ERTC. Qualified wages, according to the Internal Revenue Service (IRS), are wages paid to employees during qualifying quarters. These include salaries, tips, vacation pay, bonuses, and commissions.

Record Keeping

If you have a significant number of commission-based employees, it may be harder to keep track of employee wages compared to salary-based employees. This is further complicated if employees earn salary plus commission. Keeping detailed records is essential in this process.

Business Size

Wages you can claim for the ERTC also depend on the size of your business.

The IRS defines a small business as one with 100 or fewer employees in 2020 or 500 or fewer in 2021. Small businesses can claim 50% of all employee wages up to $10,000 per employee for 2020 and 70% of employee wages for 2021.

If your business exceeds this number, you can only claim wages for employees you paid during qualifying quarters while they couldn’t work. Since commission-only employees rely on their performance for income, this might reduce the wages you paid at that time and, therefore, those you can claim.

Combat ERTC Challenges With Skilled Tax Attorneys

If you have more questions about filing the ERTC for commission-based employees, our team at Dayes Law Firm is here to help. We’ve helped hundreds of businesses claim the ERTC, and your business could be next.