The Essential Guide to ERC Eligibility Requirements

Why Understanding ERC Eligibility Could Mean Thousands Back in Your Pocket

If you’re trying to figure out what are the eligibility requirements for erc, here’s the short answer:

To qualify for the Employee Retention Credit (ERC), a business must meet ALL of the following:

The three eligibility tests explained quickly:

1. Government shutdown test – Your business was fully or partially suspended by a government order due to COVID-19
2. Gross receipts decline test – Revenue dropped by 50%+ in any 2020 quarter (vs. 2019), or 20%+ in any 2021 quarter (vs. 2019)
3. Recovery startup test – Business launched after February 15, 2020, with under $1 million in average annual gross receipts

Credit amounts:

• 2020: Up to $5,000 per employee (50% of up to $10,000 in qualified wages)
• 2021: Up to $7,000 per employee per quarter (70% of up to $10,000 in qualified wages)

The ERC was created under the CARES Act in March 2020 to help businesses survive the COVID-19 pandemic. It’s a refundable payroll tax credit — meaning if the credit exceeds what you owe, the IRS sends you the difference as a check.

That’s a big deal. Eligible businesses can claim up to $26,000 per employee across 2020 and 2021 combined.

But here’s the problem most business owners run into: the rules are complicated, they changed multiple times across different quarters, and the IRS has flagged a wave of improper claims driven by aggressive promoters. That combination has left many eligible businesses either confused about whether they qualify, nervous about filing, or stuck waiting on a backlogged refund.

This guide cuts through the noise. It explains exactly who qualifies, how the tests work, what’s changed, and what to do if you’ve already filed.

I’m Santino Battaglieri, founder of SFG Capital, a firm that has purchased and funded over $500 million in ERC claims — giving me deep, hands-on experience with what are the eligibility requirements for erc and how those rules apply in real-world claim scenarios. In this guide, I’ll walk you through everything you need to know to assess your eligibility with confidence and protect your business from costly mistakes.

What Are the Eligibility Requirements for ERC?

The Employee Retention Credit (ERC)—often referred to as the Employee Retention Tax Credit (ERTC)—is a refundable tax credit designed to reward businesses that kept their staff on the payroll during the height of the pandemic. Unlike a loan (like the PPP), this is a credit against the employer’s share of Social Security taxes.

To start, we need to define who can actually apply. The credit is available to:

• For-profit businesses of any size.
• Tax-exempt 501(c) organizations.
• Tribal businesses.

However, the IRS is very clear: household employers (people who pay nannies or housekeepers) are not eligible. Additionally, the credit is only for “qualified wages.” These are wages paid to employees during specific periods of economic hardship. To see where you stand, we highly recommend reviewing the official IRS Eligibility Checklist to get a baseline for your specific situation.

Basic Eligibility Requirements for ERC

The “heart” of ERC eligibility lies in proving that your operations were disrupted. You don’t need to have lost money to qualify if you meet the Government Order Test.

A business qualifies if its operations were fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19.

• Full Suspension: Your doors were forced to close (e.g., a gym or a theater).
• Partial Suspension: You could stay open, but your operations were limited. This might mean your restaurant could only do takeout, or your retail store had to limit capacity to 25%.
• Nominal Impact: To qualify under a partial suspension, the “suspended” part of the business must have been more than a “nominal” portion of your operations (usually defined as 10% of total revenue or service hours).

It is important to note that a voluntary closure doesn’t count. You must be able to point to a specific government order (city, county, or state) that forced the change in your business model.

How Employee Size Limits Affect Eligibility

Your “average number of full-time employees” in 2019 determines which wages are “qualified.” This is one of the most misunderstood parts of what are the eligibility requirements for erc.

• For 2020 Claims: The threshold was 100 employees. If you had 100 or fewer employees, you can claim the credit for all wages paid to employees during the eligible period. If you had more than 100, you could only claim wages paid to employees for time they were not working.
• For 2021 Claims: The Consolidated Appropriations Act of 2021 raised this limit significantly to 500 employees. This expansion allowed much larger businesses to claim the credit for all employees, even if those employees were still working.

For both years, “qualified wages” also include the employer’s qualified health plan expenses (like insurance premiums) that are properly allocable to those wages.

Understanding the Gross Receipts Decline Test

If you weren’t shut down by a government order, you can still qualify through the Gross Receipts Decline Test. This is a purely mathematical test based on your revenue.

To run this test, we look at your “gross receipts”—which generally includes all revenue from sales, investments, and grants (but usually excludes PPP loan forgiveness). For more personalized help calculating these figures, you can check out more info about sfg-capital services.

How the Gross Receipts Test Affects Eligibility Requirements for ERC

The rules for 2020 and 2021 differ in how “significant” the decline must be:

1. The 50% Rule (2020): Eligibility begins in the first quarter of 2020 where gross receipts are less than 50% of the same quarter in 2019. Eligibility ends in the quarter after your revenue recovers to more than 80% of the 2019 level.
2. The 20% Rule (2021): The bar was lowered significantly. You only need to show a 20% drop compared to 2019.
3. Alternative Quarter Election: For 2021, the IRS allows you to use the immediately preceding quarter to meet the 20% test. For example, if your Q2 2021 revenue didn’t drop 20%, but your Q1 2021 revenue did, you might still qualify for Q2.

Using the right accounting method (cash vs. accrual) is vital here. You must stay consistent with the method you use for your tax returns.

2020 vs. 2021: Key Differences in ERC Rules

The ERC evolved through several pieces of legislation, including the American Rescue Plan Act (ARPA). Because of this, the credit is much more generous in 2021 than it was in 2020.

• Credit Percentage: In 2020, the credit was 50% of qualified wages. In 2021, it jumped to 70%.
• Wage Cap: In 2020, the $10,000 wage limit applied to the entire year (max $5,000 credit). In 2021, the $10,000 limit applied to each quarter (max $7,000 per quarter).
• Duration: The 2020 credit covered wages from March 13 to December 31. The 2021 credit covered Q1, Q2, and Q3 (and Q4 for some startups).

Special Rules for Recovery Startup Businesses

If you started your business in the middle of the pandemic, you were originally left out of the ERC. However, the law was changed to include startup recovery businesses.

To qualify as a Recovery Startup Business (RSB), you must:

1. Have begun carrying on a trade or business after February 15, 2020.
2. Have average annual gross receipts of $1 million or less for the three-year period ending with the tax year before the quarter for which the credit is claimed.
3. Not be eligible under the other two tests (shutdown or revenue decline).

RSBs are unique because they can claim the credit for the third and fourth quarters of 2021, with a maximum credit limit of $50,000 per quarter.

Current Status: IRS Moratorium and Filing Deadlines

If you haven’t filed yet, you need to be aware of the Moratorium on processing new ERC claims. In late 2023, the IRS grew concerned about “ERC Mills”—unscrupulous promoters pushing businesses to file fraudulent claims.

As of now, the IRS has implemented a moratorium on processing new claims filed after January 31, 2024. While you can still technically submit a claim via Form 941-X, the IRS is not currently processing those new submissions as they work through a backlog of 400,000 older claims (worth roughly $10 billion).

If you realize you filed an incorrect claim, the IRS has a claim withdrawal program. This allows businesses to retract their claim to avoid penalties and interest, provided the IRS hasn’t already paid the claim or if the check hasn’t been cashed.

Frequently Asked Questions about ERC Eligibility

Can I claim the ERC if I received a PPP loan?

Yes! Originally, you had to choose between PPP and ERC. However, the Infrastructure Investment and Jobs Act (IIJA) and previous updates retroactively changed this.

The only catch is “no double-dipping.” You cannot use the same dollar of payroll for both PPP loan forgiveness and an ERC claim. We call this “coordination of benefits.” You have to carefully allocate which wages go toward which program to maximize your total relief.

What documentation is needed to support an ERC claim?

The IRS is auditing ERC claims at a high rate. To protect yourself, you need a “contemporaneous record” that supports your eligibility. This includes:

• Copies of Government Orders: The specific document that forced your suspension.
• Gross Receipts Records: Quarterly profit and loss statements.
• Payroll Data: Detailed records showing wages paid to each employee, including health insurance costs.
• Work Papers: Calculations showing how you avoided “double-dipping” with PPP or other credits.

What are the warning signs of an ERC scam?

The IRS has issued several IRS scam warnings regarding promoters. Be wary if a provider:

• Charges a large percentage-based fee upfront.
• Claims “everyone qualifies” before looking at your books.
• Uses aggressive marketing or unsolicited calls.
• Refuses to sign your tax return as a preparer.

Conclusion

Navigating what are the eligibility requirements for erc is no small feat. Between the shifting employee count thresholds, the nuances of “nominal impact” for shutdowns, and the IRS’s current moratorium, it’s a complex landscape. However, for many businesses in Travis County and throughout the U.S., the potential for a $26,000-per-employee refund is too significant to ignore.

At SFG Capital, we understand the frustration of waiting on the IRS. We specialize in helping businesses in the Austin, TX area expedite their ERC refunds. We offer claim advances and buyouts that allow you to bypass IRS delays and get your capital working for you now. Our performance-based fee structure ensures that we are only successful when you are.

If you’re ready to see how much you’re owed or need help navigating a pending claim, visit more info about sfg-capital services to learn how we can help you secure your funding today.