The employee retention credit was one of the most significant COVID-19 relief programs ever offered to American employers. Even though the credit period has ended, thousands of businesses are still navigating audits, corrections, and compliance questions in 2026.
Table of Contents
- Introduction: Why the ERC Program Still Matters in 2026
- What Is the ERC Program?
- How Much Was the ERC Worth?
- ERC Eligibility: Who Qualified and When?
- How the ERC Was Claimed (and How It’s Corrected Now)
- Key Law Changes: OBBBA, Deadlines, and Extended Audit Periods
- IRS Moratoriums, Audits, and Enforcement Activity
- Voluntary Disclosure, Withdrawal Programs, and Current Options
- Frequently Asked Questions About the ERC Program
- Why Choose Our Firm
- Conclusion: What to Do About Your ERC Position Now
Introduction: Why the ERC Program Still Matters in 2026
The Employee Retention Credit (ERC), also known as the employee retention tax credit, represented one of the largest COVID-19 relief incentives available to employers between March 13, 2020, and September 30, 2021. For certain businesses classified as a recovery startup business, eligibility extended through December 31, 2021. At its peak, the program provided eligible businesses with a refundable tax credit worth up to $26,000 per employee.
Can you still claim the ERC in 2026? The short answer is no—new claims for 2021 quarters filed after January 31, 2024 are largely barred by the One Big Beautiful Bill Act (OBBBA). The claim period for the Employee Retention Credit ended on April 15, 2025, and businesses needed to file their claims before this deadline to be eligible for the credit. However, many businesses are now dealing with open refund claims, IRS examinations, amended returns that need correction, and the cascading effects on their income tax returns.
The IRS processed over $230 billion in ERC refunds by mid-2024, but widespread abuse has triggered moratoriums, special settlement programs, and extended audit periods. Many businesses that relied on aggressive ERC promoters—sometimes called “ERC mills”—filed inaccurate claims and now face penalties, repayment demands, or criminal exposure.
Our firm serves as a trusted tax advisor helping employers evaluate ERC eligibility, defend against audits, and unwind improper claims. We focus on practical compliance solutions rather than scare tactics or inflated promises.
What Is the ERC Program? (Employee Retention Credit Overview)
The erc program is a refundable tax credit and refundable payroll tax credit created by the CARES Act in March 2020 to encourage employers to keep workers on their payroll during the COVID-19 pandemic. The Employee Retention Credit (ERC) is a refundable federal tax credit designed for businesses that kept employees on their payroll during this challenging period.
The credit applied to qualified wages paid and employer-paid qualified health plan expenses for eligible employers between March 13, 2020, and September 30, 2021. Recovery startup businesses—those that began operations after February 15, 2020 with limited gross receipts—could claim the credit through the third and fourth quarters of 2021.
Unlike a Paycheck Protection Program loan, the employee retention credit erc didn’t require repayment. It reduced federal employment tax deposits, specifically offsetting the employer share of social security tax and medicare taxes. Any excess credit was refunded directly to the employer via Form 941 or as an adjustment on Form 941-X.
Several laws shaped the ERC over its lifespan:
- CARES Act (March 2020): Created the original credit but excluded PPP recipients
- Consolidated Appropriations Act (December 2020): Expanded the credit and allowed PPP recipients to claim ERC on non-overlapping wages
- American Rescue Plan Act (March 2021): Extended availability through September 2021 and added recovery startup provisions
- Infrastructure Investment and Jobs Act (November 2021): Terminated the credit early for most employers after Q3 2021
The program covered a broad range of organizations. A restaurant under indoor dining restrictions, a manufacturer facing supply chain disruptions from government orders, and a church unable to hold group meetings could all potentially qualify. An eligible employer 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 and self employed individuals are not eligible for the credit.
How Much Was the ERC Worth? (2020 vs. 2021 Credit Amounts)
The ERC’s value changed significantly between 2020 and 2021, which explains why many businesses under- or over-claimed the credit. Understanding these differences is essential for businesses reviewing past claims or defending audit positions.
2020 Credit Structure
For the 2020 tax year, the credit equaled 50% of up to $10,000 in qualified wages per employee across the entire eligible period (March 13 through December 31, 2020). In 2020, eligible businesses can claim up to $5,000 per employee through the ERC as the maximum annual credit.
The definition of qualified wages depended on employer size:
- Small employers (100 or fewer full time employees in 2019): Could include all wages paid to employees, whether they worked or not
- Large employers (more than 100 employees): Limited to wages paid to employees during periods when they were not providing services due to suspension or reduced operations
2021 Credit Structure
The 2021 rules were more generous. In 2021, eligible businesses can claim up to $7,000 per employee per quarter for the first three quarters, including the third quarter. This represented 70% of up to $10,000 in qualified wages paid per employee per calendar quarter.
The employee threshold also changed—the line between small and large employers increased to 500 full time employees based on 2019 headcount. Businesses with fewer full time employees qualified as small employers with broader wage inclusion.
Recovery Startup Business Special Rules
New businesses that started after February 15, 2020, may qualify for special provisions under the ERC to receive credits in the second half of 2021. These recovery startup businesses could claim up to $50,000 per quarter in aggregate credit during Q3 and Q4 2021, even without meeting the gross receipts or governmental order tests.
To qualify, a business needed average annual gross receipts of $1 million or less and could not otherwise meet the standard ERC eligibility requirements.
Maximum Credit Per Employee
Combining 2020 and 2021, eligible businesses can receive a total of up to $26,000 per employee through the ERC:
- 2020: Maximum $5,000 per employee (entire year)
- 2021 Q1: Maximum $7,000 per employee
- 2021 Q2: Maximum $7,000 per employee
- 2021 Q3: Maximum $7,000 per employee
Qualified wages include wages subject to FICA plus allocable employer health plan expenses. However, amounts paid toward PPP loan forgiveness, Shuttered Venue Operators Grant funds, or Restaurant Revitalization Fund cannot be double counted for ERC purposes. These amounts must not exceed the entire amount eligible for ERC treatment.
ERC Eligibility: Who Qualified and When?
Employers had to qualify quarter by quarter based on one of two tests: a significant decline in gross receipts or a full or partial suspension of the employer’s operations due to a COVID-19 governmental order. Understanding these tests is critical for defending employee retention credit claimed on past returns.
Significant Decline in Gross Receipts Test
2020 Standard: For 2020, a significant decline in gross receipts is defined as a decrease of at least 50 percent compared to the corresponding quarter in 2019. Eligibility continued until receipts recovered to more than 80% of the same calendar quarter in 2019.
2021 Standard: For 2021, the threshold lowered to a decrease of at least 20 percent compared to the corresponding quarter in 2019. Employers could also use a prior quarter lookback rule, comparing the immediately preceding quarter to the same quarter in 2019.
Full or Partial Suspension Test
The second path required a full or partial suspension of operations due to a government order. To qualify for the Employee Retention Credit, an employer must have experienced a full or partial suspension of operations due to a government order that affected at least 10 percent of its total gross receipts or working hours in 2019.
Qualifying orders included:
- Stay-at-home mandates
- Indoor dining capacity restrictions
- Elective surgery postponements
- Travel restrictions
- Bans on group meetings
The order had to be specific and mandatory—voluntary guidelines or general industry downturns without a corresponding government order typically did not qualify. For example, a gym operating under a 25% capacity limit from a state order could qualify as being partially suspended. However, a retailer experiencing reduced foot traffic without any specific restriction affecting its operations would not meet this test.
A manufacturer facing supply chain shutdowns might qualify if a governmental order directly impacted its suppliers’ operations, creating a documented chain of causation.
Categories of Eligible Employers
Tax exempt organizations under section 501(c) qualified alongside for-profit businesses. Certain eligible businesses included:
- For-profit companies of any size
- Nonprofits and charitable organizations
- Public colleges and universities
- Public hospitals
- Tribal governments and entities
Agricultural employers also qualified under specific rules addressing seasonal wage patterns.
Key Exclusions
Several wage categories could not generate ERC:
- Wages paid to a majority owner (more than 50% ownership)
- Wages paid to certain family members of majority owners
- Wages already used for PPP loan forgiveness
- Wages funded by shuttered venue operators grant or Restaurant Revitalization Fund
Businesses that received Paycheck Protection Program (PPP) loans can still claim the ERC, provided the same wages are not used for both programs. This rule, implemented by the Consolidated Appropriations Act, opened significant ERC opportunities for businesses affected by the pandemic.
By 2026, eligibility determinations focus on supporting or defending already claimed periods rather than establishing new qualification for future wages.
How the ERC Was Claimed (and How It’s Corrected Now)
Understanding the mechanics of ERC claims helps businesses evaluate whether their past filings were accurate and what correction options remain.
Original Claim Process
Employers can claim the Employee Retention Credit by filing Form 941 for each quarter, and if the credit exceeds their federal tax deposits, they can receive a refund by check when they file their Form 941. Employers reduced their federal employment tax deposits during each calendar quarter and reported credits on quarterly Form 941 filings.
During the early pandemic, employers could also request advance payments using Form 7200, though this option ended in late 2021.
Retroactive Claims via Form 941-X
Many employers who missed the original filing deadlines or didn’t claim full amounts used Form 941-X—the adjusted employment tax return—to retroactively claim ERC. If an employer has already filed Form 941 for each quarter, they may file Form 941-X with the IRS to request a refund of the Employee Retention Credit, which can be done up to three years and four months after the end of the calendar year.
Statute of Limitations Changes
The normal statute of limitations for amending returns was generally three years from the date Form 941 was filed. This originally meant:
- Most 2020 quarters: Amendable until approximately April 2024
- Most 2021 quarters: Amendable until approximately April 2025
However, the One Big Beautiful Bill Act modified these timelines, cutting off new claims for the third or fourth quarters of 2021 filed after January 31, 2024, while leaving some earlier-quarter amendment deadlines intact.
Current Focus: Corrections and Defense
As of 2026, the focus has shifted from filing new claims to:
- Correcting overstated claims through amended returns
- Defending legitimate claims during IRS examination
- Adjusting income tax returns to reflect ERC properly
When ERC is claimed or increased, the employer must reduce the wage deduction by the ERC amount for the corresponding income tax year. This requires filing amended income tax returns—Form 1120-X for C corporations, Form 1065 for partnerships, or amended individual returns for pass-through owners. There are no federal restrictions on how businesses can spend their ERC refunds, but the tax treatment must be handled correctly.
Steps for Businesses Now
- Gather payroll records for each specified time period claimed
- Compile gross receipts documentation by quarter
- Locate copies of government orders relied upon
- Review prior ERC filings for mathematical accuracy
- Verify no double-counting with PPP, SVOG, or RRF
- Consult a qualified tax preparer before filing additional amended returns
Key Law Changes: OBBBA, Deadlines, and Extended Audit Periods
Congress and the IRS responded to widespread ERC abuse by tightening deadlines and extending enforcement powers. Understanding these changes is essential for any business that claimed the credit.
One Big Beautiful Bill Act Impact
The One Big Beautiful Bill Act retroactively ended employers’ ability to file new Employee Retention Credit claims after January 31, 2024, specifically affecting claims for the third and fourth quarters of 2021. Even though the general statute of limitations would have allowed later filings, OBBBA cut off this window.
Key OBBBA provisions:
- New ERC claims for Q3 and Q4 2021 filed after January 31, 2024 cannot be paid
- ERC payments already processed through approximately July 4, 2025 are generally preserved
- The IRS gained additional tools to examine fraudulent or ineligible claims
Extended Audit Periods
Perhaps the most significant change for businesses: Congress passed a law extending the IRS’s audit period for Employee Retention Credit claims from three years to six years, increasing the time the IRS has to review claims for validity. The IRS extended the audit period for Employee Retention Credit claims from three years to six years, allowing more time for the IRS to review claims that have been paid out.
This means businesses should retain payroll and eligibility documentation well into the 2030s. Claims filed in 2024 for 2020 or 2021 quarters could potentially face examination through 2030 or beyond.
Infrastructure Investment and Jobs Act
Before OBBBA, the Infrastructure Investment and Jobs Act (November 2021) accelerated the sunset of the ERC after Q3 2021 for most employers. Only recovery startup businesses retained eligibility for the fourth quarters of 2021.
Ongoing IRS Guidance
IRS Notices 2021-20, 2021-23, 2021-49, and 2021-65 continue to govern many technical ERC questions. The internal revenue service expects businesses to apply guidance in effect for the year in question, and these notices remain relevant for audit defense.
IRS Moratoriums, Audits, and Enforcement Activity
The revenue service has dramatically increased scrutiny of ERC claims, making audit preparedness essential for any business that received or claimed the credit.
Processing Moratorium
On September 14, 2023, the IRS announced a moratorium on processing new Employee Retention Credit claims due to concerns about ineligible claims and aggressive marketing tactics by promoters. While the formal moratorium covered processing through late 2023, its effects continue through slower refunds, heightened scrutiny, and additional screening.
Claims submitted before the moratorium date still face extended review periods. Many businesses waited 12-24 months for refunds that previously took weeks.
Criminal and Civil Enforcement
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, with several individuals charged with federal crimes. These investigations target both businesses that filed false claims and ERC promoters who facilitated fraud.
In August 2023, the IRS enacted a rule stating that payments of Employee Retention Credit to ineligible employers would be treated as underpaid taxes, subject to assessment and collection like any other underpaid taxes. Employers that incorrectly claim the credit may be subject to these assessments.
The IRS has issued approximately 84,000 letters informing businesses that their Employee Retention Credit claims have been partially or fully disallowed as of May 2025. These disallowance letters trigger 30-day windows to protest determinations.
Typical ERC Audits Focus Areas
IRS audits typically examine:
- Governmental order documentation: Was there a specific order affecting the employer’s operations? Was it more than nominal impact?
- Gross receipts calculations: Do quarterly figures support the required decline?
- Wage allocation: Were wages properly split between ERC, PPP forgiveness, and other programs?
- Headcount verification: Did employee counts meet small/large employer thresholds?
- Related-party exclusions: Were majority owner and family wages properly excluded?
Penalties and Interest
Improperly claimed ERC triggers:
- 20% accuracy-related penalties for negligence or substantial understatement
- 75% civil fraud penalties for intentional misconduct
- Interest from the date the improper refund was issued
- Criminal referrals for willful fraud
Careful documentation—copies of government orders, gross receipts calculations, payroll records, board minutes—is critical to defend ERC positions years after wages were paid.
How Our Firm Assists
Our team helps businesses under examination by:
- Responding to IRS Information Document Requests (IDRs)
- Preparing reasonable cause arguments
- Managing appeals through the IRS Appeals Office
- Coordinating litigation strategy with experienced tax counsel when necessary
Voluntary Disclosure, Withdrawal Programs, and Current Options
While formal settlement programs have closed, businesses that claimed ERC in error still have resolution options.
ERC Withdrawal Program (Closed)
The IRS offered a withdrawal program allowing employers to pull back unpaid ERC claims they believed were ineligible. This program closed in 2024. Businesses with pending claims no longer have this option.
Voluntary Disclosure Program (Closed)
The IRS announced a Voluntary Disclosure Program on December 21, 2023, allowing businesses to repay 80% of funds received from incorrect ERC claims to avoid penalties and potential criminal liability. This program operated through November 22, 2024, permitting employers to disclose ERC promoters and avoid criminal exposure.
Participants repaid 80-85% of invalid ERC while avoiding penalties and, in some cases, criminal prosecution. This voluntary disclosure program is now closed.
Current Options for 2026
Businesses that claimed ERC in error still have several paths:
- File amended payroll returns (Form 941-X) to correct overclaims
- File amended income tax returns to adjust wage deductions
- Enter installment agreements (Form 9465) for amounts owed
- Negotiate resolution paths with IRS Collections
- Request penalty abatement based on reasonable cause
Proactively correcting an overstated ERC claim generally produces better outcomes than waiting for IRS examination.
Practical Scenarios
Scenario 1: Business already spent the refund A restaurant received $150,000 in ERC refunds and used the funds for operations. Upon review, only $80,000 was legitimate. The business can file an adjusted return showing the $70,000 overclaim, then work with IRS Collections on an installment agreement if full payment isn’t feasible.
Scenario 2: Claim under review, no payment received A manufacturer filed for $200,000 in ERC but received a letter questioning eligibility. If documentation doesn’t support the claim, the business can withdraw or reduce the claim before payment, avoiding penalties and interest.
Businesses should have a certified professional employer organization or qualified tax advisor re-evaluate ERC eligibility if they relied on high-pressure marketing, contingency fee promoters, or received a credit that seems unusually large compared with payroll size.
Frequently Asked Questions About the ERC Program
Can I still apply for the Employee Retention Credit now?
No. The claim period for the Employee Retention Credit ended on April 15, 2025. The One Big Beautiful Bill Act retroactively ended new claims for Q3 and Q4 2021 filed after January 31, 2024. Amendments for certain 2020 quarters may have remained within general limitation periods depending on original filing dates, but by April 2026, new claims are effectively unavailable.
What if my ERC claim was filed after January 31, 2024?
Claims for the third and fourth quarters of 2021 filed after January 31, 2024 generally cannot be paid due to OBBBA. If you filed such a claim, you may receive a denial letter. Claims for 2020 quarters filed within the normal statute of limitations before April 2025 may still have been processed.
How long should I keep my ERC documentation?
Keep all ERC-related documentation for at least 10 years. Because the audit window has been extended up to six years for some quarters, businesses should be prepared for possible ERC audits through at least 2027-2031, depending on when returns were filed.
Are tips and commissions included in qualified wages?
Yes. Tipped wages and commissions qualify as qualified wages as long as they are wages subject to FICA taxation. They must meet ERC criteria and cannot be used for PPP forgiveness or other credits simultaneously. These are considered paid qualified wages when all ERC requirements are met.
Are owner and family wages eligible?
Generally no. Wages paid to a majority owner (more than 50% ownership) and certain family members are excluded from qualified wages. This applies to spouses, children, parents, and other specified relatives of majority owners under IRS Notice 2021-49 guidance.
Can I claim ERC if I received PPP, SVOG, or RRF funds?
Yes, with limitations. Businesses that received Paycheck Protection Program loans can claim ERC, provided the same wages are not used for both programs. The same rule applies to wages funded by shuttered venue operators grant or Restaurant Revitalization Fund money—no double-dipping is permitted.
What happens if the IRS denies my ERC claim?
You have 30 days from the denial letter date to file a protest with the IRS. You can request review by the IRS Appeals Office. If you disagree with the Appeals determination, you may have options to petition Tax Court or file in federal district court, though specific procedures depend on case facts.
Will I owe income tax on ERC refunds?
ERC refunds themselves are not taxable income. However, you must reduce your wage deduction by the ERC amount claimed for the corresponding tax year. This effectively increases taxable income. If you haven’t reduced your wage deduction on your income tax returns, you may need to file amended returns.
What should I do before responding to an IRS notice about ERC?
Speak with a knowledgeable tax advisor before responding to any ERC-related IRS notice, audit letter, or promoter communication. Improper responses can waive rights or create additional liability.
Why Choose Our Firm for ERC Reviews, Audits, and Corrections
We approach ERC matters as compliance-focused advisors, not as an ERC mill. We don’t charge excessive contingent fees or guarantee unrealistic refund amounts. Determining eligibility accurately while protecting your long-term tax position is central to the approach.
Our strengths include:
- Deep experience with federal payroll tax rules since 2020
- Current knowledge of ERC legislation, IRS notices, and OBBBA provisions
- Hands-on work with ERC claims, appeals, and controversy matters
- Experience across industries: restaurants, manufacturers, medical practices, nonprofits, and certain businesses across multiple sectors
Our ERC services cover:
- Eligibility reviews for businesses that never claimed or under-claimed
- Recalculation of credits for accuracy
- Documentation packages for IRS audits
- Coordination with your CPA or in-house finance team
- Guidance on income tax return adjustments
We provide transparent pricing, written engagement terms, clear explanations of risks, and focus on your overall tax health rather than quick refunds.
Conclusion: What to Do About Your ERC Position Now
The ERC program is closed for new wage periods, but its financial and compliance impact will continue for years through audits, amended returns, and potential repayments. Congress extended audit windows, and the IRS continues actively examining claims through 2026 and beyond.
Employers should not ignore ERC—whether they claimed nothing, claimed modest amounts, or received very large refunds. Law changes and extended audit rights mean the IRS will keep focusing on these credits. The eligibility requirements for each time period remain subject to examination, and businesses must be prepared to substantiate every dollar claimed.
Your next step: Gather your payroll records, ERC calculations, PPP and grant documentation, plus any ERC promoters communications, and have a professional conduct an independent ERC review.
Contact our firm today via phone, email, or our website contact form for a confidential ERC assessment tailored to your business and filing history. We can help you understand your exposure, correct errors proactively, and defend legitimate claims effectively.
