What Employers Qualify for the Employee Retention Credit?

Most employers, including colleges, universities, hospitals and 501(c) organizations following the enactment of the American Rescue Plan Act, can qualify for the credit. 

Qualification is determined by one of two factors for eligible employers — and one of these factors must apply in the calendar quarter the employer wishes to utilize the credit:

  1. A trade or business that was fully or partially suspended or had to reduce business hours due to a government order. The credit applies only for the portion of the quarter the business is suspended, not the entire quarter.

Some businesses, based on IRS guidance, generally do not meet this factor test and would not qualify.

  • Those considered essential, unless they have supply of critical material/goods disrupted in manner that affects their ability to continue to operate.
  • Businesses shuttered but able to continue their operations largely intact through telework.

However, any of these businesses still may qualify for the credit with the second factor test.

  1. An employer that has a significant decline in gross receipts.

On Tuesday, Aug. 10, 2021, the IRS released Revenue Procedure 2021-33 that provides a safe harbor under which an employer may exclude the amount of the forgiveness of a loan and the amount of a Shuttered Venue Operators Grant or a Restaurant Revitalization Fund grant from the definition of gross receipts solely for the purpose of determining eligibility to claim the ERTC. Employers must apply the safe harbor consistently across all entities.

  • CARES Act – 2020
    • Generally, if gross receipts in a calendar quarter are below 50% of gross receipts when compared to the same calendar quarter in 2019, an employer would qualify. They are no longer eligible if in the calendar quarter immediately following their quarter gross receipts exceed 80% compared to the same calendar quarter in 2019.
  • Consolidated Appropriations Act, 2021
    • Beginning in 2021, businesses must be impacted by forced closures or quarantines or have seen more than 20% drop in gross receipts in the quarter compared to the same quarter in 2019.
    • If you are a new business, the IRS allows the use of gross receipts for the quarter in which you started business as a reference for any quarter which they do not have 2019 figures because you were not yet in business.
  • American Rescue Plan Act – 2021
    • In addition to eligibility requirements under the Consolidated Appropriations Act, 2021, business also have the option of determining eligibility based on gross receipts in the immediately preceding calendar quarter (compared with the corresponding quarter in 2019).

3. Recovery Startup Business

  • American Rescue Plan Act – 2021
    • 3rd and 4th quarter 2021 only — a third category has been added. Those entities that qualify may be entitled to up to $50,000 per quarter.

To qualify as a Recovery Startup Business, one must:

  • Have begun carrying on trade or business after Feb. 15, 2020
  • Have annual gross receipts that do not exceed $1 million
  • Not be eligible for the ERTC under the other two categories, partial/full suspension of operations or decline in gross receipts

The IRS notice 2021-49 clarified that Recovery Startups may use all qualified employee wages for purposes of the credit, regardless of the number of employees. It should also be noted that determining if this category applies is assessed for each quarter. So, if one of the other two categories — gross receipt decline or full/partial suspension — applies to 3rd quarter but not 4th, they would not be a recovery startup in 3rd quarter, yet they may still qualify as a recovery startup in 4th quarter.

The IRS notice is important in understanding how to apply upcoming changes to Form 941 necessary to claim the credit. Form 941-X will be used to retroactively file for the applicable quarter(s) in which the qualified wages were paid.  

  • Infrastructure Investment and Jobs Act – 2021
    • This law removes a condition of eligibility. Recovery startups are no longer subject to the business closure or gross receipts reduction to qualify. Essentially all RSBs are eligible in 4th quarter.