Employee Retention Credit Eligibility

Employee Retention Credit Eligibility

Employee Retention Credit Eligibility

You’re running a business in tough times, and every penny matters.

Heard of the Employee Retention Credit (ERC)? It’s a refundable tax credit, part of the CARES Act, that could save you up to $26,000 per employee.

Even if you’ve had a Paycheck Protection Program loan, you might still qualify. Though the program ended in 2021, you can file retroactively.

Let’s dive into the eligibility criteria, potential savings, and the claiming process.

Who Qualifies for the ERC?

If your business operations were partially or fully halted due to government-imposed COVID-19 restrictions, or you’ve suffered a significant decline in gross receipts in 2020 or the first three quarters of 2021, you’re likely to qualify for this financial relief. The Employee Retention Credit (ERC) is designed for businesses like yours.

Even newly started businesses, that began operations after February 15, 2020, can qualify for the ERC regardless of their revenue. The key is to have had W-2 employees and experienced the required decline in revenue within any quarter of 2020 or 2021.

The amount you can claim depends on the number of employees and the wages paid. For 2020, you can claim up to $5,000 per employee. For the first three quarters of 2021, that amount jumps to $21,000 per employee. Depending on the size of your business, this could translate to significant funding.

Don’t worry if you’ve already claimed for a Paycheck Protection Program (PPP) loan. You’re still eligible for the ERC. Just remember to file Form 941-X to amend your previous return and claim the ERC retroactively. You’ve until April 2024 to make amendments for 2020 and until April 2025 for 2021.

How Do I Qualify?

To determine whether your business qualifies for this financial aid, you’ll need to examine your company’s financial records and compare your gross receipts from 2020 and the first three quarters of 2021 to those from the same periods in 2019. If your gross receipts were 50% lower in a certain quarter than they were in 2019, you qualify to file for the Employee Retention Credit (ERC).

Consider these key points for qualification:

  • Complete or partial closure mandated by a government entity that restricts business operations
  • Substantial decrease in revenue
  • Complete or partial cessation of business activities
  • Facing decrease in providing services

Your industry also plays a role in qualification. Sectors like education, non-profit organizations, government, hospitality and retail, industrial, real estate and construction, and technology are all likely to qualify.

Essentially, the ERC is a form of financial aid for businesses that faced economic hardships during the pandemic and managed to retain their employees. It’s important to note that both essential and non-essential businesses are eligible for this payroll tax credit.

Keep in mind, many businesses disqualify themselves based on hearsay when they could very well qualify. The changes in the past year regarding ERC have made the qualifications more inclusive, so don’t count your business out. Even if you took out a Paycheck Protection Program loan, you might still be eligible for the ERC.

Understanding tax laws and regulations is crucial for maximizing your eligibility. So, take a closer look at your financial records, you might be pleasantly surprised.

How much money will my small business get from the ERC?

Depending on the year and quarter, your small business could potentially receive up to $26,000 per employee through this specific tax credit. This Employee Retention Credit (ERC) is a refundable tax credit aimed at helping small businesses impacted by COVID-19.

The amount of ERC you can claim depends on the wages you’ve paid your employees. For 2020, you’re eligible for a 50% credit on the first $10,000 in wages per employee, which amounts to $5,000 per worker. This credit can be claimed retroactively in 2023, so you’re not late for this.

During the initial three quarters of 2021, small enterprises have the opportunity to obtain a credit of up to 70% on the initial $10,000 in wages per quarter per employee, resulting in a total of $21,000.

Just remember, certain healthcare expenses qualify as part of an employee’s wages and can be included in your computations.

Adding both years together, you could potentially claim up to $26,000 per employee. That’s a sizable amount of money that can help offset the cost of keeping your employees on payroll during this challenging period.

But be mindful of the deadlines for claiming these credits. You’ve until April 2024 to amend your 2020 tax filing, and until April 2025 to amend your 2021 filing for the ERTC. Don’t miss out on this opportunity to regain some of the costs associated with retaining your valuable employees during the past years.

Is my small business eligible for the ERC?

Wondering if your small business qualifies for the Employee Retention Credit (ERC)? You’re in the right place to find out.

Let’s dive into the specific eligibility criteria that your business needs to meet to reap the benefits of this tax credit.

Number of full-time employees

You’ll need to consider the number of full-time employees in your business when determining your eligibility for the Employee Retention Credit.

For 2020, if your business averaged 100 or fewer full-time monthly employees in 2019, you’re classified as a small business. In 2021, this expanded to businesses with 500 or fewer employees.

For small businesses, the Employee Retention Credit covers all employees, regardless if they worked or not. However, for larger businesses, the credit only applies to employees who didn’t work.

Here’s a quick breakdown:

  • Small businesses in 2020: 100 or fewer employees
  • Small businesses in 2021: 500 or fewer employees
  • Larger businesses: Credit only for employees who didn’t work
  • Small businesses: Credit for all employees, working or not

Government-mandated full or partial suspension

If your business faced a government-mandated full or partial shutdown due to COVID-19, you’re likely to qualify for the Employee Retention Credit (ERC) relief program. This includes businesses that had to restrict hours or capacity due to government orders.

It’s crucial to understand that this eligibility criterion is complex, and it’s wise to consult with a professional knowledgeable in tax laws and regulations. For instance, if you owned a restaurant and were only allowed to use fewer tables due to social distancing rules, you could qualify. If your suppliers were forced to shut down, causing disruptions in your operations, you might also be eligible.

Even if only a portion of your business was shut down due to government mandates, you could still qualify for the ERC.

Significant decline in gross receipts

Another way your business might qualify for this relief program is by experiencing a significant drop in gross receipts during a specified period. The IRS defines a ‘significant decline’ differently for 2020 and 2021. For 2020, your business faced a significant decline if any quarter’s gross receipts were less than 50% of the corresponding quarter in 2019.

In 2021, the definition changed slightly. For the first three quarters of 2021:

  • Gross receipts for each quarter had to be less than 80% of the same quarter in 2019
  • If your business didn’t see a 20% decline compared to 2019, you could compare the preceding quarter to the same quarter in 2019
  • This means you could potentially compare Q1 of 2021 to Q1 of 2019 to meet eligibility requirements.

Understanding these specifics can help you maximize your claim under the Employee Retention Credit.

Recovery startup business

As a business owner who launched your venture after February 15, 2020, you’re classified as a ‘recovery startup business’ and can apply for specific tax credits for the third and fourth quarters of 2021.

The American Rescue Plan amended the Employee Retention Credit (ERC) to include businesses like yours. To qualify, you need to have annual gross receipts under $1 million. Additionally, you must employ one or more W2 employees. If you meet these criteria, you don’t have to worry about the other eligibility requirements.

The maximum you can receive is $50,000 in ERC per quarter. This significant financial incentive can help offset the costs of keeping your employees on payroll, providing a valuable lifeline for your young business during these uncertain times.

How Was This Refundable Tax Credit Established?

The Employee Retention Credit was established as part of the CARES Act to help businesses keep their employees on the payroll during the COVID-19 pandemic. This refundable tax credit was a lifeline extended to businesses facing economic decline due to the unexpected health crisis. The U.S. government rolled out this benefit with a primary goal: to sustain the economy during a challenging time.

However, the initial rollout of the ERC under the CARES Act wasn’t as beneficial as Congress intended. Many businesses struggled to qualify due to the stringent requirement of sharp revenue declines. Despite the adversities, businesses found ways to adapt and sustain revenues, albeit at slightly lower levels than before. This situation led to necessary expansions of the ERC to benefit more businesses.

At the same time, the Families First Coronavirus Response Act was passed. You might be interested to know that many employers could qualify for both ERC and FFCRA benefits. Since its inception in March 2020, the ERC program has undergone numerous changes, leading to a swarm of questions from businesses and tax professionals alike.

The IRS responded to this confusion by providing clarifying guidance on frequently asked questions about the ERC. This move cleared the path for businesses and their tax partners to claim accurate benefits with confidence. Today, if you’re a business owner who’s faced economic hardship due to the pandemic, the Employee Retention Credit may provide the financial support you need to keep your employees and recover your business.


In conclusion, the ERC could be a financial lifeline for your business during these tough times. Your eligibility depends on specific criteria, including significant operational disruption or income loss.

The potential refund could reach up to $26,000 per employee for 2020 and 2021. Although the program has ended, you can still claim retroactively.

Don’t miss out on this opportunity to bolster your business’s financial stability.

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