Employee Retention Credit Eligibility: Who Can Claim?

The employee retention credit (ERC) has been an valuable tax incentive for many businesses during recent economically challenging times. Introduced as part of the CARES Act in 2020, the credit aimed to help employers retain employees on their payrolls.

Although the ERC expired on September 30,2021, many businesses can still retroactively claim the credit for qualified wages paid during the eligible periods. Determining eligibility can be complicated though. In this guide, we’ll walk through exactly who can claim the ERC.

Suspended Operations Due to COVID-19 Orders

The most straightforward path to ERC eligibility is having operations curtailed by governmental pandemic orders.Employers qualify if a full or partial suspension of operations resulted fromorders limiting commerce, travel, group meetings, shutdowns, etc. Partial suspensions involve reduced hours or limited operations. Complete suspensionswith zero business activity also meet this threshold.

For the credit to apply, the suspension must be: 

• In 2020: In place for any calendar quarter where wages were paid
• In 2020: In place for any calendar quarter where wages were paid
• In 2021 (Q1-Q3): Effective for the immediate prior quarter when the wages were paid

So if shutdown orders spanned Q2 and Q3of 2021 in a state, employers could claim ERC on wages paid during both quarters.

Qualifying orders are from federal,state, or local governments related to COVID-19, including:

• Federal: Nationwide restrictions from agencies like OSHA or CDC
• State: Governor or state agency orders for business limitations
• Local: City, county, tribal government, etc. orders

Voluntary closures or reductions do not meet ERC eligibility requirements. However, some ambiguity exists around verbal directives from government officials that are not codified into law.

Employers must retain records proving:

• Governmental order was in effect when ERC wages were paid
• How the order specifically impacted their operations, resulting in closure, reductions, etc.

Save copies of all relevant COVID-19orders and document their parameters and business effects. These records must be provided if claiming ERC through an IRS audit.

Revenue Decline Eligibility

Along with closures due to governmental orders, employers may qualify for ERC if gross receipts dropped considerably year-over-year. The threshold for a significant gross receipts decline is:

• 2020: 50% or more reduction in a2020 quarter versus the same 2019 quarter
• 2021: 20% or more reduction in a2021 quarter versus the same 2019 quarter

When comparing gross receipts between years to identify a reduction, key notes include:

• Receipts are calculated at the entity level for the entire business, including all locations and subsidiaries
• Tax-exempt organizations can use gross receipts or revenue interchangeably
•  For new businesses established after 2019, alternative prior quarter comparisons apply

To prove a significant gross receipts decline, employers claiming ERC must retain:

• Financial statements validating receipts by quarter in 2019 and the claim year
• Tax forms substantiating gross receipts reported, like income tax returns

The gross receipts decline option also extended ERC eligibility to recovery startup businesses in 2020. This covered employers who:

• Began operating after February 15,2020
• Had gross receipts in the first quarter of 2020 allowed them to demonstrate a 50% gross receipts reduction when compared to the second quarter of 2020.

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So newer businesses without 2019comparisons could still qualify under this alternative rule.

Aggregation Rules

The various criteria above apply at the entity level, but aggregation rules also factor into eligibility. Under theseregulations from the tax code, companies must combine related organizations to assess qualifications like:

• Employee counts for size thresholds
• Gross receipts to evaluate revenue reductions
• Operations suspensions when businesses shared resources or activities

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So for businesses connected through common ownership or partnerships, assessing combined metrics is required.Aggregation examples include:

• Parent companies and subsidiaries where ownership exceeds 50%
• Companies sharing over 50% common ownership under certain structures
• Affiliated service groups like management companies and businesses they operate
• Franchises or chains with over 50%shared ownership across locations

Understanding these aggregation rules isvital to claiming ERC properly. Failing to combine related entities appropriately could mean accepting credits when combined operations don’t actually qualify.

Organization Type and Size Limits

Along with for-profit companies,tax-exempt organizations can also claim ERC. This includes entities like:

• 501(c)(3) charities
• 501(c)(6) business leagues
• 501(c)(19) veterans organizations

However, exceptions do exist regarding public employers. Government entities generally cannot claim ERC, including:

• Federal government agencies
• State governments
• Local governments (cities,municipalities, counties, etc.)
• Public colleges and universities
• Public utilities

As tribally-owned entities are not considered public agencies, they can claim ERC even though they serve governmental functions.

In addition to the core operations and revenue qualifications, employers must meet size limits regarding full-time employees to claim the credit at certain wage levels. The number of full-timeemployees dictates how much of per-employee wages qualify toward the 60% of ERC credits.

Rules to tally workers include:

• Full-time: 30+ hours per week on average or 130+ hours in a month
• Part-time: Counted as a fraction based on hours
• Seasonal: 120 hours+ in a month =1 full-time employee
• Aggregated entities: Must combine all full-time employees    

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For 2020 ERC, the following full-time employee thresholds applied:

Employee Count                      Max ERC Wage Amount

100 or less employees             Up to $10,000 per person

Over 100 employees                No credit

So small employers could qualify for a higher credit amount per employee, while larger companies could not claim any ERC based on employee quantity.

The 2021 American Rescue Plan Act expanded eligibility, raising the employee count threshold to 500 per entityincluding combined affiliates or locations. This enabled more mid-size businesses to access ERC.

With the higher 500 worker limit,companies could claim up to $7,000 per employee per quarter in 2021. This applied the full 60% credit rate to the expanded $10,000 maximum qualified wage base.

Claiming the ERC

Meeting operational disruption, revenue,and employee count factors enables claiming ERC through IRS Form 941 and other processes. As ERC stems from payroll taxes, employers claim it on IRS Form 941filed quarterly. The credit offsets the employer portion (6.2%) of Social Security tax.

Steps to claim include:

1. Continue payroll tax payments as usual
2. File Form 941 each quarter reporting wages paid and taxes owed
3. Apply ERC amounts to the tax liability, reducing payment due or  yielding a refund

So Form 941 reconciles taxes and credits quarterly, delivering ERC benefits.

If the quarterly tax savings via Form 941prove inadequate for cash flow needs, the IRS offers an expedited ERC advance.This involves:

• Filing Form 7200 detailing the ERC amount sought as an advance credit
• Receiving a refund check for the advance to access funds faster
• Reconciling the advance already issued with the actual ERC amounts on subsequent Form 941 filings

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This alternative claim process speeds access to ERC tax relief to support struggling businesses.

ERC Deadlines

While qualification rules and calculations make ERC complex, a key benefit is an extended claim window even after the credit ended in 2021. Here are the deadlines:

• 2020 ERC - File an amended return by April 15, 2024
• 2021 ERC - File an amended return by April 15, 2025

So employers have ample time to learn about ERC, assess if they qualify, calculate credits, and claim refunds. Evenif companies miss claiming ERC on initial tax filings after the years wages were paid, amended returns can recover this tax relief for prior periods.

Summary

Determining if your company qualifies for ERC requires assessing multiple criteria:

• Operations fully or partially suspended due to governmental COVID-19 orders
• Significant 50% (2020) or 20%(2021) year-over-year quarterly gross receipts decline
• Recovery startup business status(2020 only)
• Private for-profit or tax-exempt organization structure (most entities)
• Small to mid-size by employees(500 or less in 2021)   

Document eligibility and retain evidence for potential IRS audit. With broad employer eligibility beyond small businesses, ERC provides substantial tax relief to bridge pandemic impacts.Check if your company qualifies to claim this refundable credit.

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