- Employee Retention Credit Rules and Business Relief
- Understanding the Employee Retention Tax Credit
- ERC Eligibility and Qualification Requirements
- Filing and Claiming Process
- Common Challenges and Solutions
- Conclusion and Next Steps
- Frequently Asked Questions
Employee Retention Credit Rules and Business Relief
The Employee Retention Tax Credit (ERC) is a refundable tax credit established under the CARES Act in March 2020, designed to help businesses retain employees during the COVID-19 pandemic by offsetting a portion of qualified wages paid during periods of economic disruption. As of 2026, the landscape has shifted significantly—new claims are largely closed following the April 15, 2025, deadline for 2021 periods, and the One Big Beautiful Bill passed in 2025 introduced additional restrictions affecting claims filed after January 31, 2024, under updated internal revenue code provisions.
This guide covers everything business owners, HR professionals, and tax preparers need to understand about the employee retention credit ERC in 2026: past eligibility requirements, credit structure, filing procedures, current deadlines, and compliance considerations under new legislation. We exclude detailed coverage of other COVID-19 relief programs like the Shuttered Venue Operators Grant or Restaurant Revitalization Fund, though we address their interaction with ERC claims where relevant, including prior advance payment options that were available during earlier ERC periods.
The direct answer: The employee retention credit was a refundable payroll tax credit worth up to 50% of qualified wages in 2020 (maximum $5,000 per employee) and 70% of qualified wages in 2021 (up to $21,000 per employee across the first three quarters). While new claims can no longer be filed as of 2026, understanding past eligibility remains critical for audit preparation and compliance with extended IRS review periods.
By reading this guide, you will:
- Understand how the employee retention tax credit worked and its maximum credit amounts
- Determine whether your business met past eligibility requirements
- Know current filing options and what deadlines have passed
- Identify compliance risks and audit preparation strategies
- Recognize immediate next steps for businesses with pending or previously filed ERC claims
Understanding the Employee Retention Tax Credit
The employee retention credit was a refundable credit against certain employment taxes, specifically designed to encourage eligible employers to continue paying wages to employees during periods when business operations were fully or partially suspended due to government orders or when the employer’s gross receipts experienced a significant decline. Unlike non-refundable credits, this refundable tax credit meant businesses could receive cash back even if the credit exceeded their tax liability.
For businesses affected by COVID-19 restrictions, the ERC provided substantial financial relief—helping cover employee wages and qualified health plan expenses during unprecedented economic uncertainty. The credit applied to wages paid between March 13, 2020, and December 31, 2021, though most employers could only claim through September 30, 2021, with Q4 2021 reserved exclusively for recovery startup business entities.
Historical Context and Legislative Changes
The CARES Act introduced the initial employee retention tax provisions in March 2020, creating a credit equal to 50% of qualified wages paid to eligible employees. Initially, employers who received Paycheck Protection Program loans were prohibited from claiming ERC—a restriction later removed through subsequent legislation.
The Consolidated Appropriations Act of December 2020 expanded access significantly, allowing businesses to claim both PPP loan forgiveness and the retention tax credit on different wages. This change retroactively applied to 2020, opening substantial refund opportunities for eligible businesses that had previously been excluded.
The American Rescue Plan Act of March 2021 further enhanced the program by increasing the credit rate to 70% of qualified wages, raising per-employee quarterly caps, and expanding the full-time employee threshold from 100 to 500 workers. It also introduced the recovery startup business category for Q3 and Q4 2021.
The 2025 tax law changes through the One Big Beautiful Bill introduced critical modifications affecting current compliance. Section 70605(d) disallows new ERC claims for the third and fourth quarters of 2021 if those claims were filed after January 31, 2024. Additionally, the Internal Revenue Service assessment period for Q3/Q4 2021 claims extends through April 15, 2027—meaning businesses must maintain documentation well beyond typical retention periods.
Credit Structure and Amounts
The credit structure differed substantially between 2020 and 2021:
2020 Credit: The employee retention credit equaled 50% of qualified wages paid per employee, with a maximum of $10,000 in wages counted for the entire year. This meant eligible employers could receive up to $5,000 per employee for 2020.
2021 Credit: The retention tax credit increased to 70% of paid qualified wages, with the $10,000 cap measured per calendar quarter rather than annually. Across Q1, Q2, and Q3 of 2021, this allowed up to $21,000 per employee ($7,000 maximum per quarter). Fourth quarters were limited to recovery startup businesses with additional restrictions.
Example calculation: A business with 25 eligible employees that paid each worker $10,000 in qualified wages during Q2 2021 could claim $7,000 per employee (70% × $10,000), totaling $175,000 in refundable credit for that quarter alone.
The relationship between ERC and PPP loan forgiveness is critical: wages used to obtain Paycheck Protection Program loan forgiveness cannot also be used to calculate the employee retention credit. Employers must carefully allocate wages between programs to avoid the same wages being counted twice—a common compliance issue the IRS actively scrutinizes.
ERC Eligibility and Qualification Requirements
Two primary paths existed for businesses to determine eligibility for the employee retention credit: experiencing a full or partial suspension of operations due to a government order, or demonstrating a significant decline in gross receipts compared to the same calendar quarter in 2019.
Government Order Impact Test
An eligible employer under the government order test must demonstrate that an appropriate governmental authority issued orders that fully or partially suspended the employer’s operations during the applicable calendar quarter. These orders could be federal, state, or local, and needed to specifically affect how the business conducted operations.
Qualifying government orders included mandatory closures, capacity limitations, supply chain disruptions caused by supplier shutdowns, and restrictions on essential business operations. For example, a restaurant limited to 25% indoor capacity under state health orders experienced a partial suspension qualifying for ERC consideration.
Documentation requirements for proving governmental order impact include:
- The actual text of the appropriate government authority order(s)
- Dates when restrictions began and ended
- Business records showing how operations were affected
- Financial records demonstrating impact on gross receipts
- Internal communications regarding operational changes
Significant Decline in Gross Receipts Test
The gross receipts test provided an alternative qualification path based on revenue decline rather than government order impact.
2020 Requirements: An employer qualified as an eligible employer if gross receipts for any calendar quarter dropped below 50% of gross receipts for the same quarter in 2019. Once the employer’s gross receipts exceeded 80% of the same 2019 quarter, the business no longer qualified under this test.
2021 Requirements: The threshold decreased significantly—employers qualified with just a 20% decline in gross receipts compared to the same calendar quarter in 2019. This lower threshold expanded eligibility substantially.
Employers could alternatively compare to the immediately preceding quarter in certain circumstances during early 2021. For businesses not in existence during 2019, average annual gross receipts calculations used 2020 figures as the comparison baseline.
When calculating gross receipts, employers should include total revenue from sales, services, investments, and other sources. Importantly, a safe harbor allows employers to exclude forgiven PPP loans and certain grants (like Shuttered Venue Operators Grant funds) from gross income when determining ERC eligibility under the gross receipts test.
Qualified Wages and Employee Considerations
Qualified wages include wages subject to social security tax and medicare taxes, plus the employer’s share of qualified health plan expenses for those employees. Health care costs covering group health insurance premiums, dental, vision, and medical plan contributions generally count as qualified wages.
The full-time employee threshold determined which wages qualified:
- 2020: Employers with 100 or fewer full-time employees (based on 2019 counts) could include all employee wages, whether employees were working or not. Employers with more than 100 employees could only count wages paid to employees not providing services.
- 2021: The threshold increased to 500 employees. Businesses with fewer full-time employees than this threshold could claim all wages paid; larger employers could only count eligible wages during periods when employees weren’t actively working. Certain industries, including agricultural employers, faced unique workforce considerations during these calculations.
Exclusions and special rules:
- Wages used for PPP loan forgiveness cannot be claimed as qualified wages for ERC
- Owner-employees and related individuals face attribution rules limiting wage inclusions
- Tipped employees’ wages follow specific FICA calculation rules
- Employers using a certified professional employer organization must properly identify who functions as the statutory employer for wage purposes
- Tax exempt organizations could qualify as eligible employers under the same tests
A severely financially distressed employer—one whose gross receipts dropped below 10% of the same 2019 quarter—could treat all wages as qualified regardless of whether employees provided services, even above the 500-employee threshold.
Filing and Claiming Process
Understanding current filing limitations requires recognizing that the window for new ERC claims has effectively closed, though businesses with previously filed claims or those requiring amended income tax returns still face compliance obligations.
Current Filing Status and Deadlines
The April 15, 2025 deadline marked the close of the claim period for 2021 ERC claims. For 2020 claims, the statutory deadline was April 15, 2024. Businesses that missed these deadlines cannot file new claims.
Critical deadline implications under the 2025 law changes:
- 2020 periods: Adjusted employment tax return filings for 2020 needed submission by April 15, 2024
- 2021 Q1 and Q2: Claims required filing by April 15, 2025
- 2021 Q3 and Q4: Claims filed after January 31, 2024 are disallowed under OBBB Section 70605(d)
The Internal Revenue Service continues processing a substantial backlog—nearly 600,000 claims remained unprocessed as of May 2025. Businesses awaiting refunds face extended timelines, and some claims face disallowance letters requiring appeals.
Filing Procedures for Eligible Claims
For businesses with timely filed claims or those needing to amend previously submitted returns, the process centered on Form 941-X—the adjusted employment tax return or claim for refund. This form amended quarterly employment tax returns to claim the employee retention credit.
Key procedural requirements:
- Complete Form 941-X for each applicable quarter, clearly identifying the ERC claim
- Attach supporting documentation demonstrating eligibility under government order or gross receipts tests
- Adjust wage deductions on corresponding income tax returns since wages claimed for ERC are not deductible
- Coordinate with any PPP loan forgiveness documentation to ensure the same wages aren’t double-counted
Processing timelines varied significantly based on claim complexity and IRS workload. The tax benefit rule requires that income tax returns reflect reduced wage deductions when an employee retention credit claimed offsets wages—failure to make this adjustment triggers additional compliance issues.
Documentation and Record Keeping
| Document Type | Purpose | Retention Period |
|---|---|---|
| Government orders | Prove partial suspension qualification | Through April 2027 (Q3/Q4 2021 claims) |
| Quarterly gross receipts records | Document decline in gross receipts | Through April 2027 |
| Payroll registers | Support qualified wages paid calculations | Through April 2027 |
| Health plan cost records | Substantiate qualified health plan expenses | Through April 2027 |
| PPP loan documentation | Prove wage allocation between programs | Through April 2027 |
| Form 941-X copies | Record of ERC claims filed | Through April 2027 |
Given the extended 5-year assessment period for Q3/Q4 2021 claims under the Infrastructure Investment and Jobs Act provisions, documentation should be retained through at least April 15, 2027.
Common Challenges and Solutions
Businesses that claimed the employee retention credit face ongoing compliance risks, particularly given enhanced IRS enforcement and extended audit periods under 2025 legislation.
Audit and Compliance Risks
The extended assessment period through April 2027 for third quarter and fourth quarters 2021 claims means the IRS has additional time to review ERC claims. Preparation strategies include:
- Organizing all eligibility documentation by quarter in accessible formats
- Reconciling wage records between ERC claims, PPP allocations, and income tax returns
- Reviewing the basis for government order qualification with current IRS guidance
- Consulting with a qualified tax preparer to identify potential weaknesses before audit
Ineligible employers who claimed credits face disallowance notices, penalties, and interest. The IRS has specifically targeted questionable claims, particularly those filed through aggressive ERC mills.
Coordination with PPP and Other Programs
Proper wage allocation between ERC and PPP remains a significant compliance focus. Businesses must demonstrate clear separation between wages counted for PPP loan forgiveness and those supporting the employee retention credit claimed.
Common coordination errors include:
- Claiming the same wages for both PPP forgiveness and ERC
- Failing to adjust income tax returns when ERC reduces deductible wages
- Improperly allocating qualified health plan expenses between programs
Maintaining detailed schedules showing which eligible wages supported which program provides essential audit protection.
Fraudulent Claim Concerns
The Internal Revenue Service has issued repeated warnings about “ERC mills”—promoters who charged substantial fees to file questionable claims for businesses that didn’t meet eligibility requirements. Red flags that triggered IRS scrutiny include claims filed without adequate documentation, aggressive interpretations of government order impacts, and failure to reduce wage deductions on income tax returns.
Businesses that received suspicious advice should review their claims with an independent tax preparer. The ERC voluntary disclosure program and ERC claim withdrawal process provided options for taxpayers who filed improper claims to correct errors with reduced penalties, though these programs have had deadline limitations.
Conclusion and Next Steps
While new employee retention credit claims are largely closed as of 2026, understanding the program remains essential for businesses with pending claims, those requiring audit preparation, or any employer who previously claimed this refundable credit. The combination of extended IRS assessment periods, substantial claim backlogs, and 2025 legislative changes means ERC compliance will remain relevant for several more years.
Immediate actionable steps:
- Review past ERC filings to confirm timely submission before applicable deadlines
- Gather and organize all supporting documentation, including government orders, gross receipts records, and payroll registers
- Verify that income tax returns properly reflect reduced wage deductions for any quarters where ERC was claimed
- Reconcile PPP loan forgiveness documentation against ERC claims to confirm no overlapping wages
- Consult a qualified tax professional for audit preparation, particularly for Q3/Q4 2021 claims subject to extended review periods
For ongoing business needs, employers should explore other available tax credits and employment incentives. The Work Opportunity Tax Credit, Disabled Access Credit, and various state-level employment incentives may provide legitimate tax benefits for businesses affected by workforce challenges.
Need professional help managing Employee Retention Tax Credit filings, documentation, or IRS compliance concerns? Visit the CTA website for trusted guidance and experienced support.
If your business needs assistance with Employee Retention Tax Credit claims, payroll tax filings, or audit preparation, the CTA team can help.
Frequently Asked Questions
Can I still file for the Employee Retention Credit in 2026?
No. The claim period closed on April 15, 2025 for 2021 periods and April 15, 2024 for 2020 periods. Additionally, claims for the third and fourth quarters of 2021 filed after January 31, 2024 are disallowed under Section 70605(d) of the One Big Beautiful Bill. Only previously filed claims still being processed remain active—no new claims can be submitted.
What happens if I claimed ERC but wasn’t eligible?
The Internal Revenue Service may issue Letter 105-C disallowing the claim. Taxpayers have rights to protest to the IRS Independent Office of Appeals. Beyond disallowance, penalties and interest apply if wage deductions weren’t properly adjusted on income tax returns. Fraudulent claims may result in more severe civil and criminal penalties.
How long should I keep ERC documentation for potential audits?
Because the IRS assessment period for Q3/Q4 2021 claims extends through April 15, 2027, documentation should be retained at least through that date. This includes government orders, gross receipts calculations, payroll records, qualified health plan expenses documentation, and Form 941-X copies. For 2020 and Q1/Q2 2021 claims, standard three-year retention periods applied from filing dates.
Can I claim ERC and PPP on the same wages?
No. Wages used for Paycheck Protection Program loan forgiveness cannot also be used for the employee retention credit. Employers must allocate wages between programs—this requires careful documentation showing which employee wages supported PPP forgiveness versus ERC claims. Proper tracing documentation is essential for audit defense.
What constitutes a qualifying government order for ERC purposes?
A qualifying government order must come from an appropriate governmental authority (federal, state, or local) and impose mandatory restrictions that fully or partially suspended business operations. Examples include capacity limitations, required closures, operating hour restrictions, or supply chain disruptions caused by mandated closures affecting suppliers. The order must specifically affect the employer’s operations in a material way, and the business must document how operations changed due to the order.
How does the 2025 law change affect my existing ERC claim?
Under Section 70605(d) of the One Big Beautiful Bill, new ERC claims for Q3/Q4 2021 filed after January 31, 2024 are disallowed and will not result in refunds. Claims filed on or before that date may still be processed. Additionally, the audit period for Q3/Q4 2021 claims extends through April 15, 2027, giving the IRS additional time to review these claims.
What should I do if I received an IRS notice about my ERC claim?
Carefully review the notice type and respond within specified deadlines. Letter 105-C indicates claim disallowance and includes appeal rights to the IRS Independent Office of Appeals. Gather all supporting documentation, including eligibility evidence and calculation support. Consider consulting a qualified tax preparer or attorney experienced with ERC disputes to evaluate your options and prepare a response.
