ERC Large vs Small Employer Threshold: 100 or 500?

For the Employee Retention Credit, a business is a “small” employer if it averaged 100 or fewer full-time employees in 2019 when claiming the credit for 2020 quarters, or 500 or fewer full-time employees in 2019 when claiming for 2021 quarters. The ERC large vs small employer threshold matters because it controls which wages qualify: small employers can count wages paid to every employee during a qualifying period, whether the person was working or sitting at home, while large employers can only count wages paid for time an employee was not providing services.¹ A business sitting on the wrong side of the line has either shorted itself on a legitimate credit or claimed money the IRS will come back for.

How to Count Your Full-Time Employees

The count uses 2019 as the baseline year, regardless of whether the credit is being claimed for 2020 or 2021. A full-time employee is one who averaged at least 30 hours of service per week, or 130 hours in a calendar month, during 2019.² This is the same standard used for the Affordable Care Act’s employer mandate, so businesses already tracking hours for ACA purposes can pull the data from existing systems.

To calculate the average, add up the number of employees who met the 30-hour threshold in each month of 2019, then divide by 12. A business that was not operating for the full year divides by only the months it was active. Part-time employees do not count, and full-time equivalents built by combining part-time hours do not count either.³

The distinction has teeth. A business with 80 full-time employees and 200 part-timers remains a small employer under both the 2020 and 2021 rules, despite the large total headcount. The IRS will look at hours actually worked or paid for, not headcount on a single date, so payroll records from 2019 need to support whatever number ends up on the return.

Aggregation Rules Can Change Your Count

Businesses under common ownership often have to combine employee counts into a single total. The tax code treats all employees of a controlled group of corporations, or commonly controlled partnerships and sole proprietorships, as working for one employer.⁴ A parent company owning more than 50 percent of a subsidiary, or two companies with overlapping individual owners meeting that threshold, triggers the rule.

Affiliated service groups face the same requirement. When businesses regularly perform services for each other, or jointly provide services to outside clients, their workforces combine for the employee count. Shared management or centralized administrative functions can trigger aggregation even where formal ownership percentages look separate.

Family Attribution

Ownership by family members can pull related businesses into the same controlled group. Under the constructive ownership rules, stock owned by siblings, a spouse, parents, grandparents, and children is attributed to the individual when testing the common-ownership thresholds. Two restaurants each employing 60 people might look like separate small employers, but if one belongs to a parent and the other to an adult child, aggregation can push the combined count to 120 and flip the classification for 2020 claims.

A business that files as a small employer when its combined group actually sits above the threshold has claimed credit on wages that don’t qualify. The IRS treats that as an excessive claim subject to penalties and interest.

Small vs Large for 2020: The 100-Employee Line

For wages paid in 2020, the credit equals 50 percent of qualified wages, capped at $10,000 per employee for the entire year. The maximum credit works out to $5,000 per employee.¹ What counts as a qualified wage depends on which side of 100 full-time employees the business sits on:

100 or fewer full-time employees: all wages paid during a qualifying period count, whether the employee was actively working or not.¹
More than 100 full-time employees: only wages paid for time an employee was not providing services qualify.³

The practical effect is sharp. A large employer that kept its full workforce productive throughout a qualifying period in 2020 may have little or no credit to claim, because the wages were paid for services rendered. A small employer in the same situation gets credit on the entire payroll.

Eligibility to claim at all requires one of two tests for a given quarter: operations were fully or partially suspended by a government order related to COVID-19, or gross receipts dropped below 50 percent of the same quarter’s receipts in 2019.⁵ The gross receipts test ends in the first quarter after receipts climb back above 80 percent of the 2019 baseline.

Small vs Large for 2021: The 500-Employee Line

For 2021, Congress raised the small-employer threshold from 100 to 500 full-time employees, lifted the rate to 70 percent of qualified wages, and reset the per-employee cap at $10,000 per quarter rather than per year, producing a maximum credit of $7,000 per employee per quarter.⁶ A business with 300 employees that could only claim wages for idle workers in 2020 can claim all wages paid during qualifying quarters in 2021.

The qualified-wage structure mirrors 2020 at the higher cutoff:

500 or fewer full-time employees: all wages paid during a qualifying period count, regardless of whether employees were working.¹
More than 500 full-time employees: only wages for time employees were not providing services qualify.⁶

The gross receipts test also loosened for 2021. An employer qualifies in any quarter where receipts fell below 80 percent of the same quarter in 2019, compared to the 50 percent threshold that applied in 2020.¹ One boundary: the Infrastructure Investment and Jobs Act retroactively ended the credit for most employers after September 30, 2021, so wages paid in the fourth quarter of 2021 generate no credit unless the employer qualifies as a recovery startup business.⁶

Health Plan Expenses Count on Both Sides

Employer-paid health insurance costs count toward qualified wages for both small and large employers. The IRS has confirmed that allocable health plan expenses can be included even when no cash wages were paid during a period, as long as the employee meets the other requirements for the employer’s size category.⁵

This matters most for large employers. A furloughed employee who received no paycheck but stayed on the company’s health plan still generates qualified wages equal to the allocable health insurance cost, because that cost is tied to a period of non-service. For small employers, health plan costs simply add to an already broad base that already includes all cash wages.

PPP Overlap Hits Large Employers Harder

Employers who received Paycheck Protection Program loans cannot use the same wages for both PPP forgiveness and the ERC. Payroll dollars allocated to PPP forgiveness must be excluded from the ERC calculation, which means businesses that got both forms of relief have to separate which wages go toward which program.

Employer size changes how painful the overlap gets. A large employer already works from a narrower pool because only non-service wages qualify. Layer in a PPP loan that consumed some of those same non-service wages, and the actual ERC can be much smaller than the headline numbers suggest. Small employers have more room to maneuver: their entire payroll qualifies, so PPP dollars can be allocated to one set of wages and ERC dollars to another without stepping on each other.

Why Getting the Classification Right Still Matters

The window to file new ERC claims has closed for most employers. The deadline for amended returns covering 2020 quarters was April 15, 2024, and the deadline for 2021 quarters was April 15, 2025.⁷ But claims already submitted remain exposed. The One Big Beautiful Bill Act, enacted in July 2025, extended the statute of limitations for IRS assessments on ERC claims to six years for all qualifying quarters, measured from the later of the original return filing date or the date the ERC claim was submitted.

The same law extended the 20-percent erroneous-claim penalty under 26 U.S.C. § 6676 to employment tax credits for the first time. An employer that claimed an excessive ERC amount after July 4, 2025, faces a penalty equal to 20 percent of the excess unless reasonable cause can be shown.⁸ Misclassifying employer size, in order to claim credit on working employees’ wages when only idle-time wages qualify, is exactly the kind of error the six-year window is built to catch. Employers who filed claims but have not been paid can still withdraw them through the IRS withdrawal program if the adjusted return was filed solely to claim the ERC and the full claim amount is being withdrawn; withdrawn claims are treated as if never filed, with no penalties or interest.⁹

1
Internal Revenue Service. Employee Retention Credit – 2020 vs 2021 Comparison Chart
2
eCFR. 26 CFR 54.4980H-1 – Definitions
3
Internal Revenue Service. Notice 2021-20: Guidance on the Employee Retention Credit under Section 2301 of the CARES Act
4
Office of the Law Revision Counsel. 26 USC 52 – Special Rules
5
Internal Revenue Service. Frequently Asked Questions About the Employee Retention Credit
6
Office of the Law Revision Counsel. 26 USC 3134 – Employee Retention Credit for Employers Subject to Closure Due to COVID-19
7
Internal Revenue Service. Instructions for Form 941-X
8
Office of the Law Revision Counsel. 26 USC 6676 – Erroneous Claim for Refund or Credit
9
Internal Revenue Service. Withdraw an Employee Retention Credit (ERC) Claim