Business Taxes

Employee Retention Credit (ERC) Qualifications & Eligibility (2023)

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The Employee Retention Credit (ERC) has become a vital resource for businesses navigating the challenges posed by the COVID-19 pandemic.

This tax credit is designed to incentivize employers to retain their employees and continue operations. To take full advantage of the ERC, businesses must understand the qualifications and eligibility criteria. Below, we provide a concise overview of the ERC qualifications, ensuring employers have the knowledge necessary to capitalize on this valuable program.

Who Is Eligible?

Eligibility for the ERC extends to both for-profit and non-profit organizations, including corporations, partnerships, sole proprietors, and tax-exempt entities. To qualify for the credit, businesses must meet specific criteria depending on the time period in question.

For businesses that were fully or partially suspended due to government orders limiting operations, they are eligible for the ERC during the period of suspension. This applies to businesses that faced mandatory closures or significant restrictions on their operations, such as restaurants, gyms, and entertainment venues.

Additionally, the ERC is available to businesses that experienced a significant decline in gross receipts. Generally, businesses qualify if their gross receipts for a calendar quarter in 2020 were less than 50% of the gross receipts from the same quarter in 2019. However, for 2021 and 2022, the threshold increased to 20%. This provision allows a broader range of businesses, including those that were not fully suspended, to claim the credit if they experienced a substantial decline in revenue.

2020

To be eligible and qualified for the ERC in 2020, businesses had to meet specific criteria based on two main categories: full or partial suspension and significant decline in gross receipts.

  1. Full or partial suspension:
    • Businesses that were fully or partially suspended by a government order due to COVID-19 were eligible for the ERC during the period of suspension. This includes mandatory closures or significant restrictions on operations imposed by state, local, or federal authorities.
    • Examples of eligible businesses include restaurants, bars, entertainment venues, gyms, and other establishments that faced government-mandated closures or restrictions.
  2. Significant decline in gross receipts:
    • Businesses that did not face full or partial suspension could still qualify for the ERC if they experienced a significant decline in gross receipts.
    • In 2020, businesses qualified if their gross receipts for any calendar quarter were less than 50% of the gross receipts from the same quarter in 2019.
    • Once a business’s gross receipts for a quarter dropped below the 50% threshold, it remained eligible for the ERC for subsequent quarters until its gross receipts exceeded 80% of the gross receipts from the same quarter in the prior year.

2021

In 2021, the Employee Retention Credit (ERC) continued to provide crucial assistance to businesses affected by the ongoing COVID-19 pandemic. The eligibility and qualification criteria for the ERC were expanded to support a broader range of businesses.

  1. Full or partial suspension:
    • Similar to 2020, businesses that were fully or partially suspended by a government order due to COVID-19 were eligible for the ERC during the period of suspension.
    • This includes businesses that faced mandatory closures or significant restrictions on operations imposed by state, local, or federal authorities.
  2. Significant decline in gross receipts:
    • In 2021, the threshold for a significant decline in gross receipts was lowered compared to 2020. Businesses qualified if their gross receipts for any calendar quarter were less than 20% of the gross receipts from the same quarter in 2019.
    • Alternatively, for businesses that started their operations in 2019, they could compare their 2021 gross receipts to an average of their 2019 gross receipts.

Limitations

It’s important to note that certain businesses were not eligible for the ERC in 2020, including state and local governments and their instrumentalities, small businesses receiving Paycheck Protection Program (PPP) loans, and self-employed individuals claiming the qualified sick leave or family leave tax credits.

Businesses cannot “double-dip” by claiming both the ERC and other COVID-19 relief programs such as the Paycheck Protection Program (PPP) loans. This means that if a business has already received PPP funds, they cannot claim the ERC for the same wages used to qualify for PPP loan forgiveness.
However, recent legislation has allowed businesses to claim the ERC retroactively for qualified wages not used to support PPP loan forgiveness. This provision offers an opportunity for eligible businesses to still benefit from the ERC even if they previously received PPP funds.

Another limitation is that the ERC is applicable to wages paid to a limited number of employees. For businesses with 100 or fewer full-time employees, all wages paid during the eligible periods qualify for the credit, regardless of whether the employees are working or not. However, for larger businesses with more than 100 full-time employees, the ERC can only be claimed for wages paid to employees who are not providing services.

When And How To Claim?

To claim the Employee Retention Credit (ERC), businesses must follow specific procedures and meet certain deadlines.

  1. When to claim the ERC:
    • The ERC can be claimed on eligible wages paid between March 13, 2020, and December 31, 2021.
    • For wages paid in 2020, businesses can claim the credit on their applicable employment tax returns, typically Form 941, for the relevant quarters.
    • For wages paid in 2021, businesses can similarly claim the credit on Form 941 for each quarter. Alternatively, they may use Form 7200, Advance Payment of Employer Credits Due to COVID-19, to request an advance payment of the anticipated credit.
  2. Claiming the ERC:
    • To claim the ERC, businesses should report it on their employment tax return for the corresponding quarter.
    • The credit can be used to offset the employer’s portion of Social Security tax liability. If the credit exceeds the tax liability, businesses can either request a refund or apply the excess to subsequent quarters.
  3. Deadlines:
  4. ERC funding companies:
    • In cases where businesses require immediate cash flow assistance and cannot wait for the ERC refund or credit, several ERC funding companies provide options to access the credit in advance.
    • These companies can assist businesses in obtaining immediate cash flow by advancing a portion of the expected ERC refund. They typically assess the business’s eligibility, facilitate the application process, and provide funding quickly.

While utilizing an ERC funding company can help with immediate cash flow, businesses should carefully evaluate the terms, fees, and services offered by such companies before proceeding.

We recommend Omega Tax Credits as the top-rated ERC service provider for small and medium-sized businesses looking to help with claiming their ERC tax credits. They offer a free 10 minute consultation call to discuss your eligibility in more detail, and have a proven track record in helping business owners reliably claim their COVID support funds.

It’s essential to stay updated with the latest IRS guidance, review deadlines, and consider consulting tax professionals for accurate and timely filing. The IRS website provides comprehensive information and forms related to the Employee Retention Credit, ensuring businesses can claim this valuable relief measure effectively.

Summary

To claim the Employee Retention Credit (ERC), businesses need to determine their eligibility based on factors such as full or partial suspension of operations or a significant decline in gross receipts. The credit can be calculated based on qualified wages and health plan expenses, with specific formulas varying by year. Claiming the ERC involves reporting it on federal employment tax returns, such as Form 941, for the corresponding quarters.

It is crucial to maintain proper documentation and comply with IRS guidelines. Businesses should be mindful of deadlines for filing Form 941 or amended returns. Additionally, ERC funding companies, such as Omega Tax Credits, offer immediate cash flow assistance by advancing a portion of the expected credit, but businesses should carefully consider the terms and fees involved. Staying informed about IRS updates and consulting tax professionals ensures accurate and timely filing for the ERC.