Nearly 3 million U.S. businesses missed out on claiming the Employee Retention Credit (ERC) between 2020 and 2024, leaving an estimated $14 billion in unclaimed funds on the table, according to the most recent IRS data. For so many entrepreneurs, nonprofits, and eligible individuals, the biggest barrier to accessing this life-saving tax credit is confusion over who is eligible for Erc and how to qualify without making costly mistakes. The ERC was designed to reward businesses that kept employees on payroll during COVID-19 lockdowns and revenue drops, but its eligibility rules are layered and have changed multiple times over the past four years.
In this guide, we’ll break down every key eligibility requirement, walk through which specific groups qualify (and which don’t), debunk common myths about PPP loans and ERC overlap, and give you clear, actionable steps to confirm if you can claim the credit. Whether you run a tiny coffee shop, a local community nonprofit, or work as a freelance consultant, you’ll leave this article with a clear understanding of whether you fit the criteria for ERC relief.
Core Eligibility Prongs for All ERC Claimants
The simple, foundational answer to who is eligible for Erc is that any business or organization that operated during the COVID-19 pandemic and met either of two key criteria can qualify: a full or partial suspension of operations due to a government mandate, or a significant drop in gross receipts compared to a pre-pandemic baseline period. Most businesses use either the 2019 calendar year or the first four quarters of 2020 as their baseline, depending on which filing period they’re claiming credit for. You don’t have to have lost money overall to qualify — you just need to hit the revenue decline threshold for at least one quarter during the pandemic.
Now that we’ve covered the basic eligibility rules, let’s dive into specific groups that may qualify for the ERC, starting with small for-profit businesses.
Eligibility for Small For-Profit Businesses With Fewer Than 500 Employees
Before 2021, the ERC had stricter employee limits, but the Consolidated Appropriations Act (CAA) of 2021 updated the threshold to 500 full-time equivalent (FTE) employees for most for-profit businesses. This means nearly every small local business, from bookstores to food trucks, can qualify if they meet the other core eligibility rules. FTE counts include all full-time and part-time employees, adjusted for their total hours worked.
You can calculate your FTE count using this simple breakdown of eligible workers:
- Full-time employees count as 1 FTE each, no matter their weekly hours
- Part-time employees are counted by dividing their total annual hours by 2,080 (the standard full-time work year)
- Seasonal workers are excluded from the 500-employee threshold calculation
You can claim the ERC for two separate time windows: the initial 2020 period (January 1 to June 30) and the extended 2020-2021 period (July 1, 2020, to June 30, 2021). For the 2020 period, businesses with fewer than 100 FTEs qualified for the full credit, while the 2020-2021 window expanded eligibility to all businesses under 500 FTEs. You’ll need to calculate your FTE count for each quarter you plan to claim, as some quarters may fall above or below the threshold.
For example, a local bakery with 3 full-time bakers and 5 part-time front-of-house staff who work 20 hours a week each has a total FTE count of just under 8, which is well under the 500-employee limit. If this bakery faced a government-mandated lockdown or a 50% drop in gross receipts, it would qualify for the ERC.
Next, let’s look at how nonprofit organizations fit into the ERC eligibility guidelines, since their tax-exempt status changes some of the standard rules.
Eligibility for Nonprofit Organizations During the Pandemic
Nonprofits have unique ERC eligibility rules because they don’t pay federal income tax, but they can still claim the credit for qualified wages paid to their employees. Unlike for-profit businesses, nonprofits don’t have to hit the gross receipts threshold if they meet the government suspension rule — but they still need to count FTEs correctly and follow IRS documentation rules.
To qualify for the ERC as a nonprofit, follow these key steps:
- Confirm your organization is a recognized tax-exempt entity, such as a 501(c)(3) or 501(c)(4) group
- Calculate your FTE count using the same standards as for-profit businesses
- Track all qualified wages, including employer-paid health insurance premiums
- Submit Form 941-X, Amended Payroll Tax Return, to claim the credit on your payroll taxes
Nonprofits also have specific gross receipts thresholds to meet if they don’t qualify via the suspension rule. The table below breaks down the required declines for each quarter:
| Quarter | Required Gross Receipts Decline | Baseline Period |
|---|---|---|
| Q2 2020 | 50% or more | Q2 2019 |
| Q3-Q4 2020 | 20% or more | Q3-Q4 2019 |
| Q1-Q2 2021 | 20% or more | Q1-Q2 2019 |
Many nonprofits make the mistake of assuming they can’t claim the ERC because they don’t pay income taxes, but this is a common myth. The IRS has a dedicated guide for nonprofit ERC claimants, which you can access here for more details.
Many self-employed workers and independent contractors also wonder if they qualify for ERC, so let’s break down that specific eligibility criteria.
Eligibility for Self-Employed Individuals and Independent Contractors
Self-employed people can claim the ERC, but only for wages they pay to their employees, not their own salary. The table below clarifies which groups qualify for the credit:
| Group | ERC Eligibility |
|---|---|
| Sole proprietors with employees | Can claim credit for employee wages, not personal pay |
| Independent contractors | Not eligible as employees, but their employers may claim credit for payments to them |
| Freelancers with no employees | No eligible wages to claim for the ERC |
To qualify, your self-employed business must still meet the core ERC rules: either a government suspension of operations or a significant drop in gross receipts. For sole proprietors, your gross receipts include all revenue your business earns from sales, services, and fees, minus any refunds or allowances.
You’ll use either your 2019 quarterly gross receipts or the first four quarters of 2020 as your baseline period to calculate the decline. For example, if your freelance graphic design business saw a 60% drop in revenue in Q2 2020 compared to Q2 2019, you would qualify for that quarter’s credit.
One key rule to remember: you can’t claim the ERC for wages that are already covered by other tax credits, like the Work Opportunity Tax Credit (WOTC). Always keep detailed records of payroll, receipts, and government orders to support your claim if you’re audited by the IRS.
Another common question is whether businesses that only saw a partial drop in revenue can claim the credit, so we’ll cover that next.
Eligibility for Businesses That Experienced Partial Gross Receipts Declines
Most people assume you only qualify for ERC if you had to shut down entirely, but that’s not true — businesses that saw a partial decline in gross receipts can also qualify. The IRS defines a significant decline as a drop of 50% or more in gross receipts for any quarter in 2020, or 20% or more for any quarter in 2021, compared to your baseline period.
Calculating gross receipts correctly is critical for this eligibility check. Gross receipts include all revenue your business earns from sales, services, fees, and investments, but you don’t include loans, grants, or tax refunds when calculating your decline percentage.
To verify your gross receipts decline, follow these simple steps:
- Pick your official baseline period for the quarter you’re claiming
- Calculate your total gross receipts for both the baseline period and the current quarter
- Divide the current quarter’s receipts by the baseline receipts to find your decline percentage
- Confirm if the decline meets the required threshold for that tax year
For example, a retail clothing store that saw a 55% drop in sales in Q2 2020 compared to Q2 2019 would meet the 2020 threshold. However, a store that only saw a 45% drop would not qualify for that quarter. In 2021, the threshold drops to 20%, so a 25% drop in sales would qualify for that year’s credit.
The 2021 American Rescue Plan Act added a new category of eligible businesses, so let’s explore recovery startup eligibility.
Eligibility for Recovery Startup Businesses (Post-2020 ERC Updates)
Recovery startup businesses are a special group of eligible claimants that can claim the ERC through December 31, 2021, even if they don’t meet the standard gross receipts or suspension rules. These are businesses that started operating after February 15, 2020, and have average annual gross receipts of less than $1 million.
To qualify as a recovery startup, your business must meet all of these requirements:
- You began operating after February 15, 2020
- You have fewer than 500 full-time equivalent employees
- Your average annual gross receipts are less than $1 million
- You pay qualified wages to your employees during the 2021 tax year
Recovery startups can claim up to $7,000 per employee per quarter in 2021, which is the maximum credit amount for that year. Unlike standard eligible businesses, recovery startups don’t need to prove a government suspension or gross receipts decline to qualify.
For example, a new yoga studio that opened in March 2020 would qualify as a recovery startup, even if it only offered virtual classes during the initial lockdowns. This studio could claim the ERC for all wages paid to its instructors in 2021, as long as it met the other requirements.
Finally, we’ll debunk one of the most persistent myths about ERC: whether receiving a PPP loan disqualifies you from claiming the credit.
Eligibility for Businesses That Received PPP Loans (Common Misconceptions)
One of the most common myths about ERC eligibility is that you can’t claim the credit if you received a Paycheck Protection Program (PPP) loan. This is completely false — in most cases, you can claim both PPP loan forgiveness and ERC, as long as you don’t use the same wages for both programs.
The IRS clarified this rule in 2021, so you don’t have to choose between the two relief programs. The key rule to follow is that you can’t use the same wages to qualify for both PPP forgiveness and ERC. For example, if you used $10,000 in payroll costs to get PPP forgiveness, you can’t use that same $10,000 to claim ERC.
Both first-draw and second-draw PPP loans do not automatically disqualify you from ERC eligibility. First-draw PPP loans are for businesses with fewer than 500 employees, while second-draw PPP loans are for businesses with fewer than 300 employees that met specific revenue requirements. Neither loan type bars you from claiming the credit for wages not used for PPP forgiveness.
The table below summarizes the overlap rules for PPP loans and ERC:
| PPP Loan Type | Allowed ERC Eligibility |
|---|---|
| First-Draw PPP | Can claim ERC for wages not used for PPP forgiveness |
| Second-Draw PPP | Same as first-draw, no automatic disqualification |
| Shuttered Venue Operators Grant | Does not affect ERC eligibility, as long as wages are separate |
If you’re unsure about how PPP loans affect your ERC eligibility, always consult a licensed tax professional to help you navigate the rules and avoid costly mistakes.
To wrap up, who is eligible for Erc covers a wide range of businesses and organizations, from small for-profit shops and nonprofits to self-employed workers and recovery startups. The core eligibility rules boil down to pandemic-era operations, either a government suspension of operations or a significant drop in gross receipts, and proper separation of wages if you received a PPP loan. Remember, the deadline to claim the ERC is three years after you filed your original tax return, so many businesses still have time to file amended returns and claim their uncredited funds.
If you think you might be eligible for the ERC, start gathering your payroll records, gross receipts, and any government orders that affected your business. You can use the IRS’s free ERC eligibility tool to get a preliminary assessment, or consult a tax professional to help you file your amended returns correctly. Don’t leave thousands of dollars in unclaimed relief funds on the table — take action today to confirm your eligibility and claim what you’re owed.