How Many Employees Do You Need to Qualify for ERC?
Discover how your business's employee count shapes your Employee Retention Credit. Learn the specific thresholds and calculation methods for maximizing your claim.
The Employee Retention Credit (ERC) is a refundable tax credit designed to encourage businesses to retain employees despite economic disruptions. Introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, its purpose was to help employers navigate the financial challenges of the COVID-19 pandemic. The credit provides financial relief for keeping their workforce employed, functioning as a payroll tax credit against certain employment taxes.
Employee Count Thresholds
ERC eligibility and credit calculation depend on specific employee count thresholds. For 2020, a business was categorized as “small” or “large” based on averaging 100 or fewer full-time employees in 2019. This threshold determined the scope of qualified wages.
For 2021, this threshold increased to 500 full-time employees. Businesses averaging 500 or fewer full-time employees in 2019 were small employers for 2021; those with more than 500 were large employers. These thresholds are fundamental to understanding the varying rules for calculating the credit, as they dictate which wages can be considered.
Determining Employee Count
A “full-time employee” for the ERC is defined as an employee who, for any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month. This definition aligns with Internal Revenue Code Section 4980H.
The count of full-time employees is based on the average number of full-time employees in 2019. For businesses that operated for the entire 2019 calendar year, this is calculated by summing the number of full-time employees in each month of 2019 and dividing by 12. Aggregation rules apply to related entities, meaning that all employees of businesses under common ownership or control must be counted together to determine if the thresholds are met. This ensures related businesses are treated as a single employer for ERC eligibility.
Large Versus Small Employer Rules
The distinction between large and small employers impacts the types of wages eligible for the Employee Retention Credit. If a business is a “small employer,” all qualified wages paid to any employee during the eligibility period can be considered, regardless of whether the employees were actively working or not.
If a business is a “large employer,” the rules for qualified wages are more restrictive. Only qualified wages paid to employees for not providing services are eligible. This applies to periods when employees were paid but could not work due to a full or partial suspension of operations or a significant decline in gross receipts. Qualified wages include wages subject to FICA taxes and certain qualified health plan expenses.