If your business kept employees on payroll during the pandemic, you may have left significant money on the table. The Employee Retention Credit offered eligible employers up to $26,000 per employee in refundable tax credits—but understanding the program’s complex rules, filing requirements, and current IRS enforcement landscape is essential before you claim or defend any credits.
This guide breaks down everything you need to know about the ERC, from basic eligibility to the current moratorium and what steps to take if you’re concerned about a prior claim.
Table of Contents
- What Is an ERC Tax Credit?
- How the ERC Was Created and Evolved (2020–2021)
- Who Qualifies for the Employee Retention Credit?
- How Much Is the ERC Worth? (2020 vs. 2021 Rules)
- Receiving the ERC: How Claims Are Filed and Paid
- Tax and Accounting Impact of Claiming the ERC
- Current IRS Moratorium, Audits, and Enforcement Activity
- Fixing or Withdrawing Incorrect ERC Claims
- Why Work with a Professional on ERC Matters
- Frequently Asked Questions About the ERC Tax Credit
- Conclusion and Next Steps
What Is an ERC Tax Credit?
When business owners ask what is a erc tax credit, they’re referring to the Employee Retention Credit—a refundable payroll tax credit created by the CARES Act in March 2020. The program was designed to incentivize employers to keep workers on payroll during the COVID-19 pandemic rather than laying them off.
The Employee Retention Credit (ERC) is a refundable tax credit for eligible businesses and tax-exempt organizations that kept employees on payroll during the COVID-19 pandemic. Unlike many tax credits that only reduce your tax liability to zero, this refundable tax credit can actually result in cash back from the Internal Revenue Service even when your payroll tax liability is lower than the credit amount.
The ERC is claimed exclusively on employment tax returns—specifically Form 941 or the adjusted employment tax return Form 941-X. It cannot be claimed on individual income tax returns, and self-employed individuals cannot claim the credit for their own compensation.
The credit was available for qualified wages paid from March 13, 2020, through September 30, 2021, for most employers. Recovery startup businesses could claim through December 31, 2021. However, many businesses can still claim the credit retroactively by filing amended payroll tax returns within the statute of limitations.
In the sections that follow, you’ll learn exactly who qualifies as an eligible employer, how the credit is calculated for different time periods, what the current IRS enforcement activity means for your claims, and what steps to take if a prior claim may contain errors.
How the ERC Was Created and Evolved (2020–2021)
The employee retention tax credit wasn’t a static program—it changed multiple times through different pieces of legislation as the pandemic progressed. Understanding this evolution helps clarify why the rules differ depending on which calendar quarter you’re claiming.
CARES Act (March 27, 2020)
The Coronavirus Aid, Relief, and Economic Security Act established the foundational ERC program. It covered wages paid from March 13, 2020, through December 31, 2020. Initially, employers who received Paycheck Protection Program loans were excluded from claiming the ERC unless they repaid the loan by May 18, 2020.
Consolidated Appropriations Act (December 27, 2020)
The CAA retroactively changed the rules to allow PPP recipients to also claim the employee retention credit ERC—but not on the same wages used for loan forgiveness. This law extended the program through June 30, 2021, increased the credit rate from 50% to 70%, and raised the per-employee wage cap from $10,000 annually to $10,000 per quarter.
American Rescue Plan Act (March 11, 2021)
ARPA further extended the credit through September 30, 2021 (Q3), with the third and fourth quarters of 2021 limited to recovery startup business employers. These were businesses that started after February 15, 2020, with average annual gross receipts under $1 million.
Infrastructure Investment and Jobs Act (November 15, 2021)
This law abruptly ended ERC eligibility after September 30, 2021, for most employers. Only recovery startup businesses could claim ERC for the fourth quarters of 2021.
One Big, Beautiful Bill Act
Under the One Big, Beautiful Bill Act, the IRS permanently stopped accepting new ERC filings after January 31, 2024. However, claims filed before this deadline continue to be processed, and certain eligible businesses may still have opportunities through amended returns filed within applicable deadlines.
Who Qualifies for the Employee Retention Credit?
Eligibility for the employee retention credit isn’t a blanket qualification—it’s determined quarter by quarter based on specific tests. An employer must either demonstrate a decline in gross receipts compared to the same quarter in 2019 or show that operations were fully or partially suspended due to a COVID-19 governmental order. Government orders can directly impact an employer’s operations by restricting or halting business activities, and in some cases suspend operations entirely, such as limiting the number of employees who can work on-site or reducing business hours.
Eligible Employer Categories
An eligible employer for the Employee Retention Credit must be a for-profit entity, a tax-exempt organization under section 501(c) of the Internal Revenue Code, a public college or hospital, or a tribal government or entity. Household employers are not eligible.
Most government entities and their instrumentalities do not qualify for the Employee Retention Credit, with exceptions for public colleges, universities, and hospitals introduced in 2021.
Self-employed individuals cannot claim the ERC on their own self-employment income, but they may claim the credit for wages paid to their W-2 employees.
The Suspension of Operations Test
An employer is considered eligible for the Employee Retention Credit if their operations were fully or partially suspended due to a government order limiting commerce, travel, or group meetings during the COVID-19 pandemic.
Qualifying government orders include:
- Capacity limits of 50% or less
- Indoor dining bans
- Mandatory business closures
- Restrictions from an appropriate governmental authority on travel or group meetings
A partial suspension of operations must have more than a nominal effect on business operations. Supply chain disruptions or general fear of COVID without a direct governmental order from an appropriate government authority do not qualify.
The Gross Receipts Test
To qualify for the Employee Retention Credit, an employer must experience a significant decline in gross receipts, defined as a decrease of at least 50% for 2020 and at least 20% for 2021 compared to the same quarter in 2019. This required decline must be documented and measured against the applicable comparison quarter.
For 2021, employers could also use an alternative quarter election, comparing the immediately preceding quarter’s gross receipts to the same calendar quarter in 2019.
Aggregation Rules
Special aggregation rules under Internal Revenue Code sections 52(a), 52(b), 414(m), and 414(o) require related companies under common ownership to be treated as a single employer. This affects eligibility determinations, employee counts, and wage caps—and prevents businesses from artificially splitting entities to maximize credits.
How Much Is the ERC Worth? (2020 vs. 2021 Rules)
The maximum credit available differs significantly between 2020 and 2021 due to legislative changes. Here’s a clear breakdown of the credit calculation rules for each period.
2020 Credit Calculation
The Employee Retention Credit for 2020 is equal to 50% of qualified wages paid to eligible employees, with a maximum credit of $5,000 per employee for the year. The wage cap was $10,000 per employee for the entire year (March 13–December 31, 2020).
2021 Credit Calculation
For 2021, the Employee Retention Credit is equal to 70% of qualified wages paid to eligible employees, with a maximum credit of $7,000 per employee per quarter. This applied to Q1, Q2, and Q3 for most employers, and the third or fourth quarters for recovery startup businesses. If a business’s eligibility for the ERC is due to inoperability from a disaster such as a hurricane, only wages paid during the specified time period of inoperability qualify for the credit.
| Credit Element | 2020 | 2021 |
|---|---|---|
| Credit Rate | 50% | 70% |
| Wage Cap | $10,000/year | $10,000/quarter |
| Maximum Credit | $5,000/employee/year | $7,000/employee/quarter |
| Small Employer Threshold | 100 FTEs | 500 FTEs |
| Maximum Total Per Employee | $5,000 | $21,000 (Q1-Q3) |
What Counts as Qualified Wages?
Qualified wages for the Employee Retention Credit include wages subject to social security tax and can also include qualified health plan expenses, but cannot exceed $10,000 per employee per quarter in 2021.
Importantly, you cannot “double-dip.” Wages used for PPP loan forgiveness, Shuttered Venue Operator Grants, or Restaurant Revitalization Grants cannot be included as qualified wages paid for ERC purposes.
Employer Size Rules
For 2020, employers with 100 or fewer full-time employees in 2019 could count all employee wages regardless of whether employees were providing services. Large employers (more than 100 FTEs) could only include wages paid to employees who were paid but not working.
For 2021, the threshold increased to 500 full-time employees, allowing many businesses that were previously considered large employers to claim credit on wages for all employees.
Receiving the ERC: How Claims Are Filed and Paid
The ERC is claimed on quarterly employment tax returns. Since the original filing period has passed, most new claims now proceed through Form 941-X—the adjusted return for correcting previously filed quarterly payroll returns.
Historical Filing Process
During 2020 and 2021, employers could reduce federal payroll tax deposits (including withheld income tax, social security tax, and Medicare tax) in anticipation of the ERC. Employers could also request advance payments using Form 7200, though this option has been discontinued.
Current Filing Process
Businesses may still file retroactive claims for the Employee Retention Credit by submitting amended payroll tax returns (Form 941-X) for wages paid between March 13, 2020, and December 31, 2021. Each form must be mailed to the IRS, and refunds are issued via paper check or direct deposit.
Deadline Considerations
Amended payroll returns may generally be filed up to three years after the original Form 941 was filed, or two years after the tax was paid, whichever is later. This means most 2020 quarters could be amended through 2024, and some 2021 quarters through 2025—though the January 31, 2024 cutoff for new filings affects timing.
Refund Processing
Once processed, the ERC refund has no use restrictions—it’s cash your business can deploy however needed. However, due to heightened IRS scrutiny, processing times have extended significantly. Complete documentation helps reduce delays and audit risk.
Tax and Accounting Impact of Claiming the ERC
Claiming the ERC affects both your income tax returns and financial statements. Coordination with your CPA or tax adviser is essential to handle these interactions correctly.
Impact on Income Tax Deductions
The ERC reduces your income tax deduction for wages dollar-for-dollar. If you claim $50,000 in ERC, you must reduce your wage deduction by $50,000. This often requires amending federal income tax returns (Form 1120-X for corporations or Form 1065-X for partnerships) if the ERC is claimed after the original filing.
This reduction can also affect:
- Section 199A qualified business income deductions for pass-through owners
- State income tax apportionment for multi-state businesses
- Other tax calculations based on wage expenses
Nonprofit Accounting Treatment
For tax-exempt organizations, the ERC is typically accounted for under FASB ASC 958-605 as conditional contribution revenue. Recognition occurs when eligibility conditions are substantially met and collection is reasonably assured.
For-Profit Accounting Treatment
There is no single dedicated U.S. GAAP standard for government grants like the ERC. Many for-profit entities apply IAS 20 by analogy or model the credit under ASC 450 or ASC 740-style guidance. Whatever approach you choose, document your accounting policy clearly.
ASU 2021-10 requires disclosure of the nature and amounts paid or received through government assistance programs, the accounting policy applied, and the financial statement line items affected.
Current IRS Moratorium, Audits, and Enforcement Activity
The IRS has shifted dramatically from encouraging ERC claims to aggressively scrutinizing them. Widespread abuse by ERC promoters triggered a comprehensive enforcement response.
The September 2023 Moratorium
On September 14, 2023, the IRS announced a moratorium on processing new claims for the Employee Retention Credit, which will last until at least January 2, 2024. This unprecedented pause resulted from a surge of questionable claims pushed by aggressive ERC promoters who guaranteed eligibility to many businesses that didn’t actually qualify. The announcement followed extensive discussion during an IRS press conference addressing concerns about improper claims.
The IRS later resumed processing some previously filed claims on a slower, more heavily reviewed basis with enhanced fraud screening.
Criminal Investigations and Audits
As of July 2023, the IRS’s criminal investigation division had begun 252 investigations into over $2.8 billion of potentially fraudulent Employee Retention Credit claims. By mid-2024, the IRS had opened over 1,800 audits and hundreds of criminal probes, recovering billions in improper claims.
In August 2023, the IRS enacted a new rule stating that payments of Employee Retention Credit to ineligible employers would be considered underpaid taxes and would be assessed and collected like any other underpaid taxes.
Extended Statute of Limitations
Congress passed a law giving the IRS five years to audit claims for the Employee Retention Credit, which is longer than the usual three years. This extended time period gives the government significantly more runway to challenge questionable ERC claims, even those that have already been paid.
Promoter Crackdown
The IRS launched Project Sentinel to pursue ERC promoters, seeking over 1,000 injunctions against firms that made misleading guarantees. Businesses that relied on generic ERC mills or high-pressure third party payers are at heightened risk and should gather contemporaneous documentation to defend legitimate claims.
Fixing or Withdrawing Incorrect ERC Claims
Many employers now worry that their ERC claims may have been overstated or improperly supported—often because they relied on promoters who used aggressive or flawed theories. Fortunately, options exist to correct these situations before the IRS initiates enforcement action.
Voluntary Disclosure Program
On December 21, 2023, the IRS announced a Voluntary Disclosure Program allowing businesses to repay 80% of funds received from incorrect ERC claims to avoid penalties and potential criminal liability. Participants could resolve their situation by returning 80% of the principal received plus interest, generally avoiding penalties and certain enforcement actions.
This initial VDP window closed on March 22, 2024, though a second program ran through November 22, 2024.
ERC Claim Withdrawal Process
The IRS has established a process for employers to withdraw an erroneous Employee Retention Credit (ERC) claim that has not yet been paid, which can help avoid penalties and interest if the claim is audited.
Employers can only use the ERC claim withdrawal process if the claim was made unintentionally and has not yet been paid, according to IRS guidelines. This option is valuable for businesses that submitted claims before recognizing eligibility issues.
Amending Previously Paid Claims
For claims that have already been paid, employers may need to file an adjusted return to reduce or eliminate previously claimed ERC. This often triggers the need to also file amended income tax returns to restore wage deductions and adjust owners’ K-1 allocations.
Documentation Is Critical
Whether maintaining, adjusting, or withdrawing claims, thorough documentation is essential:
- Time-stamped government orders affecting your employer’s operations
- Gross receipts calculations by quarter
- Ownership aggregation analysis
- Full-time employees counts and wage allocation memos
- Health plan expenses supporting schedules
Working with qualified tax professionals—rather than promoters paid on a contingency percentage—protects your position if the IRS questions your claim.
Why Work with a Professional on ERC Matters
While the ERC can be extremely valuable, the rules are complex, and the IRS is actively challenging questionable claims. Expert help protects both your refunds and your compliance standing.
What a Qualified Advisor Provides
A knowledgeable tax preparer or employment tax specialist can help with:
- Quarter-by-quarter eligibility testing
- Careful allocation of qualified wages and health plan expenses
- Coordination with PPP and other overlapping credits
- Preparation of Form 941-X with supporting schedules
- Analysis of whether your organization qualifies under suspension or receipts tests
Evaluating Prior Claims
Experienced ERC professionals can review claims prepared by promoters and identify red flags—such as blanket “government order” theories that don’t hold up to scrutiny, fabricated suspension arguments, or unsupported gross receipts calculations. They can recommend whether to maintain, adjust, or withdraw existing claims.
Audit Readiness
If the IRS opens an audit, you’ll need organized documentation, narrative explanations of how government orders affected operations, and experienced representation to respond to Information Document Requests (IDRs).
What to Look For
Seek advisors with:
- Transparent fee structures (not large contingency percentages of 25% or more)
- Clear written eligibility analyses
- Employment tax, accounting, and controversy experience
- Willingness to say “no” if you don’t qualify
Avoid purely marketing-driven ERC shops that guarantee every business qualifies—that’s simply not true, and the IRS has made clear that such blanket claims are a major red flag.
Frequently Asked Questions About the ERC Tax Credit
Is the ERC still available?
While no new wages qualify after 2021, certain eligible businesses may still file amended returns within the statute of limitations for 2020 and 2021 quarters. However, under the One Big, Beautiful Bill Act, the IRS stopped accepting new ERC filings after January 31, 2024, so the window for new claims has closed.
Can I claim ERC if I received a PPP loan?
Yes. Thanks to the Consolidated Appropriations Act, businesses can use both programs—but not on the same wages. Careful allocation between wages used for PPP forgiveness and those claimed for ERC is required to avoid double-dipping.
How long do ERC refunds take now?
Due to the moratorium and enhanced review procedures, processing can take many months—sometimes a year or longer. Timelines vary depending on IRS backlog and whether a claim gets flagged for additional scrutiny.
What documents do I need to keep for ERC?
Maintain comprehensive records including:
- Payroll records showing wages subject to Social Security tax
- Health plan invoices supporting qualified health plan expenses
- Gross receipts schedules compared to the same quarter in 2019
- Copies of government orders from an appropriate governmental authority
- Internal eligibility memos and any legal or accounting advice received
What are the risks of using ERC promoters?
Many businesses that relied on ERC promoters face audit exposure, penalties, interest, and potentially criminal liability if claims were knowingly inflated or unsupported. The IRS specifically warns against promoters who incorrectly claim every business qualifies or who use contingency fees based on credit amounts.
Can agricultural employers or essential businesses claim ERC?
Yes, agricultural employers and essential businesses can potentially claim the credit if they meet the eligibility tests. Being deemed “essential” doesn’t automatically disqualify you—what matters is whether you had a significant decline in gross receipts or experienced a full or partial suspension of operations due to a government order that affected your operations (such as capacity limits or required modifications).
What happens if I incorrectly claim the ERC?
Improper claims can result in repayment of the full credit plus interest and penalties. In August 2023, the IRS clarified that such payments would be treated as underpaid taxes. The IRS has also initiated criminal investigations for the most egregious cases.
Conclusion and Next Steps
The Employee Retention Credit represents one of the most valuable pandemic relief programs ever created. However, it’s now one of the most heavily scrutinized by the IRS. Understanding eligibility requirements, calculation rules, and current enforcement activity is essential. This applies to any business that has claimed or is evaluating this credit.
Employers still have opportunities to review prior claims for accuracy, confirm wage allocations, and consider amendments or withdrawals if a promoter pushed overly aggressive positions. With the statute of limitations closing on many quarters and IRS audits ramping up, the time to act is now.
If you haven’t analyzed your eligibility: Gather your payroll records, revenue documentation, and any government orders that affected your operations. Work with a qualified tax adviser to conduct a comprehensive ERC review.
If you’ve already claimed ERC: Review your prior claims carefully. Confirm that your eligibility analysis was sound, that wage allocations were proper, and that you have documentation to defend your position if audited.
Ready for the next step? Contact us for a confidential ERC assessment, audit-readiness review, or second opinion on any existing employee retention credit claimed. Our team can help you navigate this complex landscape and protect your business from unnecessary risk.
