The Employee Retention Credit is a refundable tax credit established under the CARES Act to provide financial aid to businesses due to the COVID-19 pandemic. It targets businesses who may be experiencing the most financial hardship due to COVID-related government mandates and declines in gross receipts during the pandemic. To apply for this tax credit, businesses must make sure that they are fully eligible, or they could be at risk of an audit from the IRS. If eligible, businesses can earn up to $26,000 per W-2 employee.  

Eligibility Requirements for ERC

To narrow down which businesses can receive the refundable tax credit, the IRS determined a list of eligibility requirements that all applicants must follow. A false claim to the IRS could put a business at risk of an audit. 

Businesses who experienced a decline in gross receipts are eligible for the ERC tax credit. In addition, if business operations were halted partially or fully due to a government mandate, that business is eligible for the ERC tax credit. An ERC full or partial suspension can be through a government mandate on the state, local, or federal level. 

The ERC tax credit is calculated using qualified wages paid to employees during the pandemic. For this reason, businesses must make sure that they paid qualified wages during the eligibility periods that they want to apply for. This is the most important aspect of the application, as it determines how much your business can earn. 

Although the ERC tax credit is available for both the 2020 and 2021 tax years, not every business will be eligible for both. Businesses who are eligible for the 2021 tax year may not be eligible for every quarter of this tax year. Only recovery startup businesses are eligible for the fourth quarter of the 2021 tax year. 

What Types of Businesses Should Apply for ERC?

Businesses across any industry can apply for the ERC tax credit. This includes salons, restaurants, construction companies, retail, digital marketing agencies, and more. However, there are limitations as to what types of businesses may be eligible. 

Sole proprietors and those who are self-employed and work alone are not eligible for the ERC tax credit. If a self-employed person has W-2 employees who work with them, they may be eligible through qualified wages paid to those employees. 

There are also limitations for S corporations looking to apply for the tax credit. While they could still be eligible for the tax credit, determining qualified wages for them can be tricky. For that reason it is best to hire a certified ERC specialist to help with your application. 

Family-run businesses may be eligible for the ERC tax credit, but they cannot use wages paid to immediate family members in most cases. For example, brothers, sisters, mothers, fathers, children, and spouses who were paid during the pandemic do not count towards the tax credit, even if they are W-2 employees. These family-run businesses can, however, use wages paid to employees who are not relatives. 

If your business is eligible for the ERC tax credit, you must apply before the application deadline for your eligible tax year.