The IRS places some different restrictions on the employee limit for ERTC qualification depending on which year and quarter you apply for. How do you know if your trade or business meets the eligibility requirements for the ERTC? Additionally, is your business a small business or a large business according to the IRS, and how will the size affect your ERTC refund?

Qualifying for the ERTC

The Employee Retention Tax Credit (also called the ERTC or ERC) is a refund available for qualified wages paid for 2020 and the first three quarters of 2021 for eligible businesses. Eligibility requirements for 2020 include:

  • Having 100 full-time employees or fewer as a small business
  • A significant decline in gross receipts of 50% or more from the corresponding quarter in 2019 or having to fully or partially shut down due to a government mandate

Eligibility requirements for 2021 include:

  • Having 500 full-time employees or fewer as a small business
  • A significant decline in gross receipts of 20% or more from the corresponding quarter in 2019 or having to fully or partially shut down due to a government mandate

There are other rules to be aware of, such as if your company must file in accordance with certain aggregate rules. Consult with an experienced business tax professional or attorney before filing Form 941-X, the Adjusted Employment Quarterly Federal Tax Return.

What is the Difference Between What Small or Large Businesses Can Claim?

The difference between a small business and a large business is that each would receive a different refund value for qualified wages paid. For small employers with 100 full-time employees or fewer, all wages paid are qualified wages. For large employers with over 100 full-time employees, only wages paid for hours not worked are qualified wages.

What does that mean? For a small employer, if they pay an employee for 40 hours, but the employee only worked 20 hours due to government mandates limiting employee hours or activities during the pandemic, the employer could claim all 40 hours when calculating the tax credit.

However, if a large employer paid an employee for 40 hours when the employee only worked for 20 hours, the large employer could only calculate the tax credit using the 20 hours that the employee didn’t work and would exclude the 20 hours that the employee did work.

Only Count Full-Time Employees

A notice issued by the IRS in 2021 clarified that employers may only count full-time employees and not full-time equivalent employees in their ERTC calculations. This means that you would not count full-time equivalent employees toward whether your company qualifies as a small business or a large business for the purpose of meeting the employee limit for ERTC claims.

Does a Tax Exempt Organization Qualify for the ERTC?

Yes, non-governmental, non-profit organizations qualify for the ERTC. The tax code describes non-profit organization activities as “engaged in a trade or business” for the purposes of any organizational operations.

Because tax-exempt organizations must follow their own complex set of tax reporting standards, you should consider finding an experienced tax attorney or professional who has worked with non-profit organizations before and understands the specific reporting requirements for income and expenditures.

Contact a Knowledgeable ERTC Law Firm

For more information about the employee limit for ERTC claims and whether your company qualifies as a small business or large business for the ERTC, contact us at Dayes Law Firm in Phoenix, AZ. Call today at 800-503-2000 or contact us online to schedule a consultation with an experienced business tax attorney.