In the laws that govern the ERC program, the only wages large eligible employers can include in their ERC calculation are the "wages paid to an employee for time that the employee is not providing services." But what, exactly, does that mean? Why does it matter? And what's the difference between a "large employer" and a small one anyway?

Large vs. small employers

In the ERC program, the cutoff between a large and small employer is simply a number. However, depending on what year you're filing for, that number changes.

But they do share one constant: they're both based on the average number of full-time, W2 employees you had in 2019.†

For each ERC-eligible year, a business is considered a large employer if they had:

Special considerations for determining employer size

Now, in addition to these cutoffs, there are some other rules you should be aware of when calculating your 2019 employees.

For starters, the IRS has stated that businesses do not need to count "full-time equivalent employees" when determining their average number of full-time employees in 2019.

Basically, this means that two or more part-time people don't make a full-time person. Instead, you only count the actual full-time individuals—those who averaged at least 30 hours per week or 130 hours in a month.

Next, you need to know that any business filing for ERC is potentially subject to the IRS's aggregation rules. Essentially, these rules state that some businesses may be required to be treated as a single employer if they are:

• Part of a parent-subsidiary controlled group

• Part of a brother-sister controlled group

• Part of a combination of the above two groups

Under these rules, if multiple businesses must be treated as a single employer, it's more likely that they could fall under the "large employer" category, which would affect which wages can be counted in their ERC calculation.

Actual wages that DO count for large employers

Now that you have a better understanding of how to determine if you're a large employer, let's talk about what the actual qualified wages are for them.

For starters, even though the determination of employer size is based only on full-time employees, the actual calculation can include pretty much any W2 employee who did not perform services.

That means hourly, part-time, full-time, non-exempt salaried employees, and exempt salaried employees can all count—as long as the wages being counted are related to hours paid but not worked.

In addition, the IRS has also stated that certain health plan expenses can also count as qualified wages. But again, there's the caveat that the portion being counted has to relate back to hours not worked by the employee.

So how, exactly, does that caveat work? Well, the best way to explain it is with an example.

In an imaginary scenario, let's say a company has an employee whose hours were cut by 75% because of a government mandate. Even though they are only able to work 10 hours a week, their employer decides to still pay them for a full 40 while also continuing to pay for their full health coverage.

In this example, 30 hours of the employee's wages—the ones they were paid for but didn't actually work—can count as qualified wages. Plus they can also count 75% of the health plan expenses since they paid 100% despite the employee only working 25%.

This process of determining qualified wages based on hours paid but not worked would then continue for each of the large employer's employees.

Wages that DON'T count as qualified wages for large employers

First off, there's the obvious: any wages paid to an employee for hours actually worked don't count as qualified wages for large employers.

In addition, if a large employer is eligible for the ERC because of a government shutdown order, qualified wages can only come from the dates the order was in effect. So if the order is lifted in the middle of a quarter, the only qualifying wages are those paid to employees for not working prior to the date the order ended.

Large employers also can't count wages classified as sick leave or paid time off for vacations. Because these types of benefits are typically paid as benefits for work already done by the employee, they inherently cannot count as wages paid for not performing work.

And finally, any wages taken into account under sections 7001 and 7003 of the Families First Coronavirus Response Act (FFCRA) can not count as qualified wages for large employers.

Learn more about qualified wages for large employers

Even though there's lots of extra rules large employers have to navigate when utilizing the ERC program, they don't have to feel overwhelming.

The IRS has provided lots of detailed information, along with multiple examples of how these rules apply to different scenarios, when they released Notice 2021-20. (We especially recommend reviewing questions 34–38 and 42.)

In addition, they've also released several other resources you can reference to learn more about aggregation rules, their full-time equivalents ruling, and other related topics. These resources include Notice 2021-49, Notice 2021-23, and their aggregation FAQ page.

However, if wading through IRS documents doesn't sound like your version of a good time, then you can always just count on our experts here at ERC Go.

If you're a large employer, we've got your back. We know how ERC qualified wages apply to businesses of ANY size. We're here to make an accurate calculation of your credits easy and stress-free.