What Are the Ways To Qualify for the ERC?

July 26, 2023
Dayes Law Firm

Wondering whether you qualify for the ERTC (Employee Retention Tax Credit), also known as the ERC? Through this program, the IRS gives eligible employers a refund for a percentage of qualified wages paid to employees during the pandemic. If you’re one of them, the credit could make your business’s financial struggles a bit easier to bear.

But the IRS requirements for the ERTC are rather strict, and not every business meets them. To qualify, your business will need to have experienced a drop in gross receipts or closure due to government orders.

Government Shutdowns

For 2020 and 2021, your business can qualify for the ERTC if it experienced a full or partial suspension of operations because of government mandates. Your business must have shut down anytime during 2020 or the first three quarters of 2021 to be eligible.

A full shutdown is pretty self-explanatory, but what exactly counts as a partial shutdown? Let’s say you run what the government deemed an “essential business,” such as a grocery store, gas station, bank, or medical clinic. 

The government ordered you to serve customers during reduced hours or limit the number of clients you could serve at one time. That could qualify as a partial shutdown.

Gross Receipts Test

Even if you didn’t have to close down your business, you could still qualify for the ERC if it saw a significant decline in gross receipts. What constitutes a significant decline differs from 2020 to 2021.

To qualify for 2020, your business must have had at least a 50% drop in gross receipts compared to the same calendar quarter in 2019. For 2021, your gross receipts for a calendar quarter must be 80% of your receipts from the same quarter in 2019.

Recovery Startup Businesses

If you launched your business during the pandemic, you could qualify for the ERC as a recovery startup business. If you’re eligible, the IRS may let you claim the credit retroactively for both 2020 and 2021.

You’ll need to meet the following requirements:

  • You started your business on or after February 15, 2020
  • You have at least one W-2 employee (excluding family members and owner-operators)
  • Your gross receipts are below $1 million for 2020 and 2021

Qualified Wages Paid to Employees

You can claim the ERC only for qualified wages you paid during 2020 and 2021. If you had 100 or fewer full-time employees in 2020 or 500 or fewer full-time employees in 2021, qualified wages include all wages paid to each employee per quarter whether or not they were actively working for you. It also includes healthcare plan costs paid by you. For ERC purposes, a full-time employee is one who works more than 30 hours per week.

If you had more than 100 employees in 2020 or more than 500 in 2021, qualified wages are those paid to employees who weren’t working due to a drop in gross receipts or government orders.

Do You Qualify if You Took a PPP Loan?

Originally, the IRS barred businesses from claiming the ERC if they also took out a Paycheck Protection Program (PPP) loan. That restriction no longer applies.

But it’s important to know you can’t claim this refundable tax credit for wages forgiven (or expected to be forgiven) by your PPP loan.

Reach Out to Dayes Law Firm PC to Learn Whether You Qualify for the ERC

Still unsure whether you qualify for the ERTC? Determining eligibility can be confusing, especially if your business has a complicated tax situation. If you need help understanding the credit eligibility requirements, call Dayes Law Firm PC at (866) 257-1223 today.