ERC Eligibility Checklist: Do You Qualify?
Navigate the complex qualification paths and financial calculations for the Employee Retention Credit to accurately determine your business's eligibility.
The Employee Retention Credit (ERC) was a refundable tax credit for businesses and tax-exempt organizations that retained employees during the COVID-19 pandemic. As of 2025, the program is closed to new applications, as the filing deadlines for 2020 and 2021 claims passed on April 15, 2024, and April 15, 2025, respectively.
Due to a high volume of questionable claims, the IRS implemented a moratorium in September 2023, halting the processing of new claims to increase scrutiny. A significant backlog of claims submitted before the moratorium remains, leading to processing delays. The credit’s original rules remain relevant for businesses with pending claims or those facing an audit.
Primary Eligibility Tests for Businesses
Foundational Requirements
To qualify for the ERC, an entity had to be an eligible employer, which included businesses and tax-exempt organizations that paid wages during the pandemic. Self-employed individuals were not eligible based on their own earnings. The rules also treated certain related businesses as a single employer, requiring them to test for eligibility on a combined basis.
The Gross Receipts Test
One eligibility method was the gross receipts test, which compared revenue between calendar quarters. For 2020, a business qualified if a quarter’s gross receipts were less than 50% of the same quarter in 2019. For 2021, the requirement was a decline of at least 20% in gross receipts compared to the same 2019 quarter.
An alternative for 2021 allowed using the immediately preceding quarter’s gross receipts for the comparison. “Gross receipts” included total sales, amounts received for services, and investment income. For example, a business with $200,000 in gross receipts in Q2 2019 needed to show its Q2 2020 receipts were below $100,000.
The Government Order Suspension Test
The second eligibility pathway was the government order suspension test. A business qualified if its operations were fully or partially suspended during a quarter due to a government order limiting commerce, travel, or group meetings because of COVID-19. A voluntary closure did not meet this requirement.
The suspension must have impacted a “more than a nominal portion” of the business’s operations. For instance, a restaurant forced to close its dining room by a state order met the partial suspension test, even if it continued takeout services.
Calculating Qualified Wages and the Credit Amount
Distinguishing Between Large and Small Employers
The credit calculation depended on the employer’s size. For 2020, a small employer had 100 or fewer average full-time employees in 2019; for 2021, this increased to 500 or fewer. This distinction dictated which wages qualified.
Small employers could include wages paid to all employees during the eligible period, whether they were working or not. Large employers could only claim the credit for wages paid to employees for time they were not providing services.
Qualified Wage Limits for 2020
For 2020, the ERC was 50% of qualified wages, capped at $10,000 per employee for the entire year (March 13 – December 31). This resulted in a maximum credit of $5,000 per employee for 2020.
Qualified Wage Limits for 2021
For 2021, the credit rate increased to 70% of qualified wages. The wage limit was $10,000 per employee, per quarter, creating a potential maximum credit of $7,000 per employee per quarter.
The Infrastructure Investment and Jobs Act retroactively ended the ERC for most businesses for the fourth quarter of 2021. The only exception was for “recovery startup businesses,” which were new businesses started after February 15, 2020, with average annual gross receipts under $1 million.
What Counted as Qualified Wages
Qualified wages included cash compensation and employer-provided health plan expenses. A limitation was that wages could not be used for both the ERC and another federal relief program. Wages used for Paycheck Protection Program (PPP) loan forgiveness, Shuttered Venue Operator Grants, or Restaurant Revitalization Fund grants were not eligible for the ERC.
Status of Claims and Required Documentation
Navigating the ERC Backlog and Moratorium
For businesses concerned about the accuracy of a submitted claim that has not yet been paid, the IRS created a special claim withdrawal program. This process allows an employer to retract their claim and avoid future penalties, provided they meet certain conditions. The claim must have been filed on an amended return solely to claim the ERC, and the business must withdraw the entire amount of the claim before the IRS pays it.
Maintaining Documentation for Audits
Proper documentation is necessary to substantiate an ERC claim during a review or audit. Businesses must maintain records supporting eligibility for each quarter claimed. This includes:
- Detailed payroll records showing wages paid to each employee.
- Revenue calculations for the gross receipts test.
- Copies of government orders that limited operations and documentation of their impact.
- Records of PPP loans, including the forgiveness application, to prove wages were not used for both programs.
Claiming the ERC requires an adjustment to the business’s income tax return. The deduction for wages must be reduced by the amount of the credit received.