The ERC Program: How the Employee Retention Credit Works, Who Qualifies, and What to Do Now

Table of Contents

• Introduction: Why the ERC Program Still Matters in 2026
• What Is the ERC Program and How Does It Work?
• How Much Is the ERC Worth? Credit Amounts by Year
  • ERC Amounts for 2020
  • ERC Amounts for 2021
• Who Qualifies for the ERC? Eligibility Rules for 2020 vs. 2021
  • Eligibility Based on Gross Receipts Decline
  • Eligibility Based on Governmental Orders
  • Special Cases: Tax-Exempt Organizations, Recovery Startups, and Other Nuances
• How to Claim the ERC Retroactively
• IRS Moratorium, Audits, and Voluntary Programs
  • IRS Moratorium and Elevated Audit Activity
  • Voluntary Disclosure and Withdrawal Options
• Why Choose Our Firm to Navigate the ERC Program
• FAQs About the ERC Program
• Conclusion and Next Steps

Introduction: Why the ERC Program Still Matters in 2026

The Employee Retention Credit (ERC) is a refundable payroll tax credit worth up to $26,000 per employee, created under the CARES Act to help businesses keep workers on payroll during COVID-19 disruptions. Even though new wage periods no longer qualify, many businesses can still claim substantial refunds for prior tax years by amending their payroll returns within applicable deadlines for the employee retention tax credit.

If you’ve been confused by the erc program, you’re not alone. The rules changed multiple times across different pieces of legislation. Aggressive promoters flooded the market with questionable claims. And now, the IRS has responded with a moratorium on processing, heightened audits, and criminal investigations. Business owners are left wondering whether they qualify, whether their existing claim is defensible, or what to do if they receive an IRS notice.

This guide delivers clear answers. You’ll learn how the employee retention tax credit works mechanically, the specific eligibility requirements for 2020 and 2021, how to file or correct claims using Form 941-X, and what the current IRS enforcement landscape means for your business.

Who this guide is for:

• Employers who never claimed the ERC but may still be eligible
• Businesses that filed ERC claims and are uncertain about accuracy
• Companies facing IRS letters, audits, or compliance questions
• Advisors helping clients navigate ERC eligibility and corrections

What Is the ERC Program and How Does It Work?

The Employee Retention Credit was established as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law on March 27, 2020, to support employers during the COVID-19 pandemic. The credit provided financial incentives for businesses to retain employees on payroll rather than resorting to layoffs during widespread economic disruptions.

The credit is refundable, meaning if the credit exceeds your share of employment taxes for a given quarter, the IRS issues a cash refund directly to you. The refundable nature of the credit provides liquidity that can be a critical buffer against economic downturns or unexpected disruptions. By covering payroll costs, the ERC helps companies avoid layoffs and maintains workforce stability under rules reviewed by the internal revenue service.

Key legislative milestones:

• CARES Act (March 2020): Created the ERC for wages paid from March 13, 2020, through December 31, 2020
• Consolidated Appropriations Act (December 2020): Extended the credit through June 30, 2021, and allowed PPP recipients to also claim ERC
• American Rescue Plan Act (March 2021): Extended the credit through December 31, 2021, and expanded eligibility
• Infrastructure Investment and Jobs Act (November 2021): Ended the program early for most employers as of September 30, 2021

The ERC is not available for wages paid after December 31, 2021, unless for specific recovery startup businesses in Q3/Q4 2021. However, employers can still retroactively claim ERC refunds by amending payroll tax returns within the statute of limitations, which is why the credit remains relevant today.

Interestingly, the Employee Retention Credit was also available to businesses affected by Hurricane Katrina, Hurricane Rita, and Hurricane Wilma in 2005, allowing them to claim a tax credit for wages paid to eligible employees during periods of inoperability due to the hurricanes—demonstrating the credit’s roots as pandemic relief and disaster response legislation.

How Much Is the ERC Worth? Credit Amounts by Year

The maximum credit differs substantially between 2020 and 2021 due to legislative expansions. Understanding these differences is essential for calculating your potential benefit.

For 2020, the credit can be up to $5,000 per employee, while for 2021, it can be up to $21,000 per employee—yielding a combined potential maximum of $26,000 per employee across both periods. A business with 10 eligible employees in all applicable quarters could potentially claim up to $260,000.

ERC Amounts for 2020

• Credit equals 50% of qualified wages paid between March 13 and December 31, 2020
• Wage cap of $10,000 per employee for the entire year
• Maximum credit of $5,000 per employee for 2020
• Qualified wages include both cash compensation subject to Social Security tax and the employer-paid portion of qualified health plan expenses, including wages subject to ERC rules.
• “Large employer” threshold: 100 or more full-time employees (based on 2019)
• Large employers could only claim wages paid to employees not providing services
• Small employers (under 100) could claim wages for all employees, regardless of whether they worked

ERC Amounts for 2021 (First Three Quarters)

• Credit rate increased to 70% of qualified wages per quarter
• Wage cap reset each quarter to $10,000 per employee
• Maximum credit of $7,000 per employee per quarter
• Potential maximum of $21,000 per employee across Q1, Q2, and Q3 2021
• “Large employer” threshold expanded to 500 or more full-time employees (based on 2019)
• This expansion significantly increased the number of employers who could claim wages paid to working employees, including certain paid wages in eligible quarters.

Recovery Startup Businesses: A special rule allowed certain recovery startup businesses to claim the employee retention credit ERC in the third and fourth quarters of 2021, capped at $50,000 per quarter, including the third quarter under the special rule. This applied to businesses that began operations after February 15, 2020, with average annual gross receipts under $1 million, even if they didn’t meet the standard eligibility tests.

Who Qualifies for the ERC? Eligibility Rules for 2020 vs. 2021

ERC eligibility generally requires meeting one of two tests for each calendar quarter:

1. A significant decline in gross receipts compared to 2019, or
2. A full or partial suspension of operations due to a governmental order related to COVID-19

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.

Eligibility is determined quarter by quarter—you might qualify in Q2 2020 but not Q3 or qualify under the receipts test one quarter and the suspension test another. Compiling precise revenue data and documentation of applicable government orders is essential.

Eligibility Based on Gross Receipts Decline

Gross receipts follow the definition used for income tax returns, comparing each calendar quarter against the same quarter in 2019.

For 2020:

• To qualify for the Employee Retention Credit in 2020, an employer must have experienced a significant decline in gross receipts, defined as a decrease of at least 50 percent compared to the same quarter in 2019, which was the required decline for that year.
• Eligibility continues until gross receipts exceed 80% of the comparable 2019 quarter

For 2021:

• For 2021, the threshold for a significant decline in gross receipts is reduced to a decrease of at least 20 percent compared to the same quarter in 2019, or compared to the previous quarter if the employer was not in business in 2019
• An optional “look-back” rule allows using the prior quarter for comparison

Example: If your Q1 2021 gross receipts were $800,000 and Q1 2019 receipts were $1,050,000, the approximately 24% decline would meet the 2021 threshold, making you eligible for that quarter.

Businesses that are part of aggregated groups under Internal Revenue Code Section 52 must apply IRS aggregation rules, which can significantly affect eligibility determinations for related entities.

Eligibility Based on Governmental Orders and Operational Suspension

A full or partial suspension requires a specific government order—federal, state, or local—that limited commerce, travel, or group meetings due to COVID-19, with more than a nominal impact on the employer’s operations.

Employers are eligible for the Employee Retention Credit if their operations were fully or partially suspended due to a government order related to COVID-19, affecting at least 10 percent of their total gross receipts or working hours in 2019.

Examples of qualifying partial suspensions:

• Restaurant capacity limits (e.g., 25-50% maximum occupancy)
• Mandatory closure of indoor dining while allowing only curbside pickup
• Restrictions on elective medical procedures
• Closure of retail showrooms with only reduced hours or curbside operations permitted
• Limits on group meetings or gathering sizes affecting essential businesses

Businesses that could continue operations through telework may not qualify if their core business operations were not materially affected. General public health guidance or voluntary closures typically do not meet the governmental order requirement.

Documentation essentials: Compile a timeline including the specific executive orders or public health mandates (with dates), the restrictions imposed, and how those restrictions affected your revenues, workforce, and supply chain issues.

Special Cases: Tax-Exempt Organizations, Recovery Startups, and Other Nuances

ERC eligibility extends to tax exempt organizations under IRC section 501(c), public colleges and universities, hospitals, and tribal governments, provided they meet the same suspension or gross receipts criteria as for-profit businesses.

A recovery startup business is defined as an entity that:

• Began principal operations after February 15, 2020
• Has average annual gross receipts under $1 million (using the prior three-tax-year aggregation test)
• Does not otherwise qualify via receipts decline or suspension

These businesses could claim ERC in the third or fourth quarters of 2021 even without meeting standard eligibility tests, capped at $50,000 per quarter.

Important exclusions:

• Self-employed individuals cannot claim ERC on their own Schedule C net earnings—only on wages paid to actual employees
• Wages paid to certain majority owners (greater than 50% ownership) and their family members are excluded due to attribution rules under IRC Section 318
• The same wages cannot be used for both PPP forgiveness and ERC

These related-party rules are technical and frequently misapplied by ERC promoters, making professional review advisable.

How to Claim the ERC Retroactively (Forms, Deadlines, and Documentation)

Since all qualifying wage periods are now in the past, eligible businesses claim the employee retention credit by amending prior payroll tax returns using Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund).

Employers can file Form 941-X with the IRS to request a tax refund for the Employee Retention Credit up to three years and four months after the end of the calendar year if the original Form 941 was filed before that date, within the applicable specified time period.

Critical deadlines:

• Deadlines to claim the ERC include April 15, 2024, for 2020 and April 15, 2025, for 2021
• As of 2026, most 2020 quarters are now past the deadline, and 2021 deadlines are approaching or passed

Step-by-step process:

1. Determine eligibility for each quarter (gross receipts test or suspension test)
2. Calculate qualified wages paid, including the allocable portion of health plan expenses
3. Coordinate with PPP and other credits—the same wages cannot be claimed for both
4. Prepare Form 941-X for each eligible quarter with detailed explanations in Part 3
5. Mail paper forms to the designated IRS address (electronic filing is not available for ERC claims)
6. Monitor for refunds or IRS correspondence

Processing expectations: Many ERC refunds have taken 6-18+ months due to IRS backlogs and additional review following the 2023 moratorium. Patience and robust documentation are essential.

Documentation requirements:

• Eligibility analyses for each quarter
• Gross receipts calculations with supporting financial records
• Copies of applicable government orders with effective dates
• Payroll records showing amounts paid per employee
• Health insurance invoices showing qualified health plan expenses
• PPP forgiveness documentation
• Internal memos explaining your methodology

For businesses with multiple entities, complex ownership structures, or prior PPP loans, working with an experienced tax preparer or CPA is strongly recommended.

IRS Moratorium, Audits, and Voluntary Programs: Current Risk Landscape

Due to widespread abuse and aggressive marketing by ERC promoters, the IRS imposed a moratorium on processing new ERC claims, dramatically increased audits, and launched voluntary programs for employers to correct improper claims. The environment is now enforcement-focused, making accuracy and documentation critical for any business with an ERC claim.

IRS Moratorium and Elevated Audit Activity

On September 14, 2023, the IRS announced a moratorium on processing new Employee Retention Credit claims filed on or after that date, including certain new claims that required additional review. This action responded to IRS concerns about billions of dollars in potentially fraudulent or incorrect ERC claims.

The situation has intensified since then:

• The IRS has initiated 301 criminal investigations related to ERC claims involving over $3.4 billion, highlighting the agency’s focus on combating fraudulent claims
• The One Big Beautiful Bill Act made the temporary processing suspension of new ERC claims permanent, retroactively disallowing claims for the third and fourth quarters of 2021 after January 31, 2024
• The IRS continues to conduct thousands of ERC audits, promoter investigations, and civil examinations
• ERC remains a top “Dirty Dozen” tax scam focus area

Taxpayers must be prepared to defend their Employee Retention Credit (ERC) claims with appropriate substantiation and proof of eligibility, as the IRS has ramped up audit activity related to ERC claims.

Any IRS letters you receive—whether audit notices (Letter 566 or Letter 3523), compliance checks, or proposed adjustment letters—should be handled promptly and carefully. You typically have 90 days to respond with documentation.

Legitimate claims filed before the moratorium are still valid and will eventually process, but expect longer timelines and more detailed review from IRS examiners.

Voluntary Disclosure and Withdrawal Options for Incorrect ERC Claims

In December 2023, the IRS introduced a Voluntary Disclosure Program allowing employers who received ERC funds they were not entitled to to repay approximately 80% of the credit, potentially reducing penalties and interest.

Key points about voluntary programs:

• The initial voluntary disclosure window closed March 22, 2024
• A separate withdrawal procedure exists for employers whose ERC claims have not yet been paid
• Withdrawing an unpaid claim can help avoid penalties, interest, and potential criminal exposure
• Participation in voluntary programs typically waives certain appeal rights

If the IRS denies an ERC claim, the taxpayer must ensure they meet IRS administrative appeal deadlines to challenge the denial outside of formal litigation—typically 30 days from the notice date.

Employers who are unsure about the validity of their ERC claim—especially those filed by aggressive promoters without adequate analysis—should obtain an independent review before deciding whether to stand by the claim, withdraw it, or pursue a voluntary correction.

If your claim was prepared by an ERC promoter now under investigation, or if you suspect you may have filed based on eligibility requirements you didn’t actually meet, professional evaluation is essential.

Why Choose Our Firm to Navigate the ERC Program

Navigating the ERC in today’s enforcement environment requires more than basic tax knowledge. Our firm has provided ERC services since the credit’s inception in 2020, helping eligible businesses across industries claim credits they deserve while avoiding common pitfalls.

What sets us apart:

• Deep ERC experience: We’ve guided businesses through every legislative change since the CARES Act
• Industry breadth: Successful claims for healthcare providers, hospitality businesses, manufacturers, agricultural employers, nonprofits, and more
• Thorough eligibility analyses: We document precisely how each quarter qualifies, whether through gross receipts decline or partial suspension of business operations
• Conservative, defensible positions: We don’t rely on broad marketing promises or one-size-fits-all assumptions that trigger IRS audits
• Transparent fee structures: You know exactly what you’re paying before we begin

For businesses that already filed ERC claims with another provider, we offer second-opinion reviews to identify potentially overstated credits that create ERC audit risk—or understated credits that left money on the table.

If you’re facing an IRS notice or have concerns about a prior filing, we provide audit defense representation with detailed knowledge of how IRS examiners evaluate ERC based claims.

Ready to take the next step? Schedule a confidential ERC review to discuss your specific situation.

FAQs About the ERC Program

Can I claim ERC if I received a PPP loan?

Yes. Recent legislation allows businesses that received Paycheck Protection Program (PPP) loans to also claim the ERC, provided the same wages are not used for both programs. You must carefully allocate wages—typically using PPP-covered wages first for forgiveness, then claiming remaining wages for ERC eligibility.

How long do I have to file Form 941-X?

The general statute of limitations is three years from when the original Form 941 was filed or two years from when the tax was paid, whichever is later. Deadlines to claim the ERC include April 15, 2024, for 2020 and April 15, 2025, for 2021. Given it’s now 2026, most opportunities have passed or require immediate attention.

What records should I keep for an ERC audit?

Maintain eligibility documentation (gross receipts calculations, copies of government orders with effective dates), payroll records, health insurance invoices, PPP forgiveness documentation, and written analyses explaining how you determined qualification for each quarter. The IRS may request this at any time during an ERC audit.

What if my ERC claim was prepared by a promoter now under investigation?

Obtain an independent professional review immediately. You remain responsible for the accuracy of your return regardless of who prepared it. If the claim was incorrectly filed, you may need to repay the credit plus penalties and interest. Voluntary withdrawal or disclosure programs may be available depending on your situation.

Can startups and nonprofits qualify for the ERC?

Yes. Tax exempt organizations qualify under the same tests as for-profit businesses. Recovery startup businesses—those that began after February 15, 2020 with average annual gross receipts under $1 million—had special eligibility for Q3 and Q4 2021 even without meeting standard criteria.

How long will my refund take?

Processing times have varied dramatically. Pre-moratorium claims have taken 6-18+ months. Claims filed during periods of heightened IRS scrutiny may take longer and face additional review. The IRS provides no guaranteed timeline, and many businesses continue waiting.

What happens if I incorrectly claim the ERC?

The IRS may assess additional taxes, 20% negligence penalties, and interest. In cases involving fraud or willful misconduct, criminal charges are possible. The IRS continues pursuing both employers and promoters who filed improper claims.

How do I respond to an IRS ERC audit notice?

Respond within the deadline specified (typically 90 days). Compile all documentation supporting your eligibility for each quarter claimed. Consider engaging a tax professional or attorney experienced in IRS audits—especially for Letter 566 or Letter 3523 correspondence. Failing to respond can result in automatic denial of your credit.

Conclusion and Next Steps

The ERC remains a legitimate opportunity for eligible employers, but the window to claim or correct credits has largely closed or is closing rapidly. With statutes of limitations expiring and IRS enforcement at an all-time high, taking action now—whether to pursue a valid claim, correct an improper one, or defend an audit—protects your business.

Key takeaways:

• Know the differences between 2020 and 2021 eligibility requirements
• Confirm qualification quarter by quarter with proper documentation
• Avoid shortcuts offered by high-pressure ERC promoters
• Understand that certain eligible businesses may have missed significant credits

Whether you’re claiming for the first time, need a second opinion on an existing claim, or are responding to IRS correspondence, our team can help. Contact us today for a confidential ERC eligibility review or audit defense consultation.

With the right guidance, you can confidently claim the credits you’re entitled to—or proactively address past filings before they become costly problems.