- Understanding the Employee Retention Credit (ERC)
- Understanding Employee Retention Credit Fundamentals
- ERC Eligibility Requirements and Business Qualification
- ERC Credit Calculation and Filing Procedures
- Common ERC Challenges and Solutions
- Conclusion and Next Steps
- Frequently Asked Questions
Understanding the Employee Retention Credit (ERC)
The Employee Retention Credit (ERC) is a refundable tax credit established under the Internal Revenue Code to help eligible employers retain employees during the COVID-19 pandemic by offsetting payroll taxes, including certain medicare taxes. If you’re searching for “what is ERC,” you’ve likely encountered references to this significant tax benefit that allowed many businesses to claim substantial refunds for qualified wages paid during 2020 and 2021.
This guide covers ERC fundamentals, eligibility requirements, credit calculations, filing procedures, and the program’s current status as of 2026. It does not provide specific accounting advice for individual situations—consult a qualified tax preparer for personalized guidance. Business owners, HR professionals, and tax professionals seeking to understand how the employee retention tax credit worked, whether they qualified, and what the current claim landscape looks like will find comprehensive answers here.
Direct answer: The Employee Retention Credit ERC is a refundable tax credit that was available to eligible employers who continued paying employees during COVID-19-related business disruptions, providing credits of up to $5,000 per employee for 2020 and up to $26,000 per employee for 2021 , often resulting in a substantial ERC refund.
By reading this guide, you will:
- Understand the precise definition and mechanics of the employee retention credit
- Learn eligibility requirements including business suspension and gross receipts tests
- Know how to calculate maximum credit amounts for both 2020 and 2021
- Understand the filing process and current program status
- Recognize common challenges and how to address improper claims
Understanding Employee Retention Credit Fundamentals
The employee retention credit was designed as pandemic relief to reduce economic damage businesses suffered by helping cover wages and related health care costs during periods of disruption. Unlike a loan that requires repayment, this tax credit directly reduces payroll tax liability or triggers a refund when the credit exceeds liabilities. For business owners and tax professionals, understanding ERC remains relevant for retrospective claims, amended returns, and ongoing IRS audit responses.
ERC Program Origins and Timeline
The CARES Act introduced the employee retention credit in March 2020, covering qualified wages paid after March 12, 2020 through December 31, 2020. The original program required either full or partial suspension of business operations by governmental order or a significant decline in gross receipts exceeding 50% compared to the same calendar quarter in 2019.
Legislative expansions dramatically changed the program in 2021. The American Rescue Plan Act increased the credit rate from 50% to 70% of qualified wages, raised employer size thresholds from 100 to 500 full-time employees, and lowered the revenue decline test to 20%. The Infrastructure Investment and Jobs Act then retroactively limited fourth quarter 2021 eligibility to recovery startup business entities only.
Understanding this timeline matters because different rules apply to different calendar quarters, directly affecting which wages paid qualify and the maximum credit available during the third quarter and other eligible periods.
Refundable Tax Credit vs. Loan Structure
A refundable tax credit means the full credit amount is available regardless of tax liability—if the employee retention credit claimed exceeds employment taxes owed, the Internal Revenue Service issues a refund for the difference. This distinguishes ERC fundamentally from programs like the Paycheck Protection Program, where businesses received PPP loans that required either repayment or meeting specific forgiveness criteria.
The credit applies against the employer’s share of social security tax on quarterly employment tax returns. When filing Form 941, employers reduce their payroll tax deposits by anticipated credit amounts, or file adjusted employment tax returns (Form 941-X) to claim credits retroactively.
With the credit mechanics established, understanding who qualifies becomes the essential next step.
ERC Eligibility Requirements and Business Qualification
Qualifying for the employee retention credit required meeting specific criteria during applicable quarters. Two primary paths existed: business operations being fully or partially suspended by appropriate government authority orders, or experiencing a decline in gross receipts meeting specified thresholds.
Business Suspension Criteria
An eligible employer qualified through business suspension when governmental authority orders limited commerce, travel, or group meetings in ways that fully or partially suspended operations. Partial suspension of operations occurred when a significant portion of business operations could not continue due to government order restrictions.
Qualifying scenarios included mandatory closures of non-essential businesses, reduced occupancy requirements, travel restrictions affecting business activity, and limitations on group meetings or gatherings. The appropriate governmental authority issuing orders could be federal, state, or local—any official body with jurisdiction over the employer’s operations.
Documentation requirements were strict: employers needed to preserve the actual text of government orders, effective dates, specific restrictions imposed, and evidence of how those orders affected their business operations during the specified time period.
Revenue Decline Thresholds
For 2020, the gross receipts test required the employer’s gross receipts to decline by more than 50% compared to the same quarter in 2019. Eligibility continued until gross receipts exceeded 80% of the same calendar quarter baseline, allowing many businesses to claim the credit across multiple quarters.
The 2021 rules lowered this threshold significantly: a decline in gross receipts of more than 20% compared to the same quarter in 2019 established eligibility. Businesses that began operations after 2019 could compare against immediately preceding quarters. This change made many businesses eligible that wouldn’t have qualified under 2020 standards, especially those with lower average annual gross receipts.
Revenue decline and government order suspension function as alternative qualification paths—meeting either test for a given calendar quarter established eligibility for that period, helping determine whether the organization qualifies for ERC benefits.
Entity Type Requirements
Eligible businesses included for-profit companies of any size, tax-exempt organizations under Section 501(c), certain colleges and universities, hospitals, and private foundations. The breadth of eligible employer categories meant the program reached diverse sectors across the economy, including some agricultural employers.
Exclusions applied to federal, state, and local government employers (with limited exceptions), household employers, and self-employed individuals claiming credit for their own earnings. Self-employed individuals could claim ERC only for wages paid to employees—not for self-employment income. Additionally, the same wages cannot be used for both ERC and PPP loan forgiveness, preventing double benefits from overlapping relief programs.
Aggregation rules required related businesses under common ownership to be treated as single employers for eligibility testing and employee count thresholds.
ERC Credit Calculation and Filing Procedures
With eligibility established, calculating the actual credit amount requires applying specific formulas that differ between 2020 and 2021 program years.
Credit Amount Calculation Process
The calculation method depends on which calendar quarter’s wages you’re claiming and whether the employer exceeds size thresholds.
Step 1: Determine qualified wage base per employee Qualified wages include amounts paid to employees plus allocable qualified health plan expenses. For “small” employers (100 or fewer full-time employees in 2020; 500 or fewer in 2021), all wages paid during eligible quarters qualify. For larger employers, only wages paid to employees not performing services qualify—those retained but unable to work due to suspension or decline.
Step 2: Apply percentage rates For 2020, the credit equals 50% of qualified wages. For 2021 (Q1-Q3), the rate increased to 70% of total qualified wages.
Step 3: Apply per-employee caps The 2020 maximum credit was $5,000 per employee for the entire year ($10,000 in wages × 50%). For 2021, the cap was $7,000 per employee per quarter ($10,000 × 70%), potentially totaling $21,000 per employee for the third and fourth quarters of eligibility (Q1-Q3).
Step 4: Calculate total credit across all eligible employees Sum individual employee credits for the applicable quarters. A business with 50 employees each qualifying for maximum 2021 credits could claim up to $1,050,000 across three quarters.
Filing Methods Comparison
| Filing Method | Timeline | Use Case | Processing Time |
|---|---|---|---|
| Form 941 (Original) | During quarter wages paid | Real-time credit claims reducing deposits | Standard processing |
| Form 941-X (Adjusted Return) | Within statute of limitations | Retroactive claims for prior quarters | Significant backlog (12+ months) |
| Original Filing with Credit | Quarterly | Employers aware of eligibility during eligible period | Standard processing |
| Amended Return Post-Deadline | N/A | No longer available for most periods | Claims past deadline not accepted |
For 2020 wages, the filing deadline was April 15, 2024. For 2021 wages, the deadline was April 15, 2025. As of 2026, new ERC claims for most periods are no longer possible, though the IRS continues processing previously submitted claims and conducting audits.
The adjusted return approach requires Form 941-X for each quarter being amended, with careful documentation supporting eligibility and wage calculations.
Common ERC Challenges and Solutions
Many businesses encountered significant complications when navigating ERC rules, and understanding these issues helps both past claimants and those responding to IRS inquiries.
PPP Loan Coordination Complexity
Employers who received PPP loans faced the challenge that the same wages cannot count for both PPP forgiveness and ERC claims. The solution requires careful allocation: identify which wages subject to PPP forgiveness and ensure ERC claims use only wages paid beyond those amounts.
Document the specific payroll periods applied to PPP forgiveness, then calculate ERC using remaining qualified wages. Many businesses that initially claimed only PPP forgiveness later discovered substantial ERC eligibility for non-overlapping wage amounts paid during eligible quarters.
Employee Count Threshold Confusion
Determining whether an employer had more than 100 (2020) or 500 (2021) full-time employees requires counting employees who averaged 30 hours per week or 130 hours per month during 2019. Part-time employees don’t count toward the threshold but may generate qualified wages for small employers.
The aggregation rules compound complexity: related entities under common ownership combine employee counts. A business group with three companies, each having 200 employees, would aggregate to 600—exceeding 2021 thresholds and limiting which wages qualify.
Fraudulent Claim Concerns
The IRS identified widespread improper claims promoted by aggressive third-party ERC promoters. By early 2024, voluntary disclosure programs recovered $225 million from businesses that incorrectly claimed credits, with audit assessments reaching hundreds of millions more.
For businesses that may have filed incorrectly claimed credits, options include the ERC claim withdrawal process (for unprocessed claims), voluntary disclosure programs with reduced penalties, and amended income tax returns reducing wage deductions. The Internal Revenue Service has extended audit authority for certain claims to five or six years, making proper documentation and legitimate eligibility essential.
Conclusion and Next Steps
The Employee Retention Credit was a substantial refundable tax credit providing up to $26,000 per employee to eligible employers who continued paying wages during COVID-19-related business disruptions. Understanding the interplay between government order suspension, decline in gross receipts thresholds, and proper wage calculations determined whether businesses could claim the credit and maximize their benefit.
Immediate actionable steps:
- Review any pending ERC claims for accuracy and legitimate eligibility before IRS processing
- Gather and preserve documentation including government orders, gross receipts records, payroll data, and PPP coordination records
- Consult a qualified tax preparer to assess audit risk and respond appropriately to any IRS notices
- If you filed incorrectly claimed credits, evaluate voluntary disclosure options before IRS enforcement action
For businesses seeking ongoing tax optimization, related topics like R&D tax credits, Work Opportunity Tax Credit, and other business tax incentives offer legitimate opportunities beyond the now-closed ERC program.
CTA can help you better understand ERC eligibility, payroll tax credits, and the documentation required for compliant filings. Visit the CTA website today to explore additional tax credit resources and professional guidance for your business.
Frequently Asked Questions
Can I still claim ERC in 2026?
Generally, no. The ERC program ended for most employers after September 30, 2021 (December 31, 2021 for recovery startup business entities). More importantly, filing deadlines have passed: April 15, 2024 for 2020 claims and April 15, 2025 for 2021 claims. New ERC claims submitted after these deadlines will not be accepted by the Internal Revenue Service under standard procedures.
What’s the difference between ERC and PPP loans?
The employee retention credit is a refundable tax credit that doesn’t require repayment if properly claimed. The Paycheck Protection Program provided loans that could be forgiven if used appropriately for payroll and other eligible expenses. While both programs supported employee retention during the COVID-19 pandemic, they have different structures, eligibility requirements, and critically, the same wages cannot be used for both programs.
How do I know if my business qualifies for ERC?
Qualification required meeting criteria during specific 2020 or 2021 calendar quarters: either experiencing full or partial suspension by appropriate governmental authority orders, or showing a significant decline in gross receipts (more than 50% for 2020, more than 20% for 2021) compared to the same quarter in 2019. The employer must also meet entity type requirements and properly calculate qualified wages paid during eligible periods.
What documentation do I need for an ERC claim?
Essential documentation includes: copies of government orders affecting your business operations (with dates and specific restrictions), gross receipts records for relevant quarters compared to 2019, complete payroll records showing wages paid and qualified health plan expenses, evidence of employer size (full-time employee counts), and documentation of any PPP loans received with records showing which wages applied to PPP forgiveness versus ERC claims.
Can I claim ERC if I received a PPP loan?
Yes, but with restrictions. Employers who received PPP loans may still claim ERC for qualified wages not used for PPP loan forgiveness. The same wages cannot count toward both programs. Careful documentation of which payroll costs applied to PPP forgiveness is essential—ERC claims should include only wages paid beyond those amounts during applicable quarters.
What should I do if I filed an incorrect ERC claim?
Options depend on your claim’s status. For unprocessed claims, the ERC claim withdrawal process allows you to withdraw the claim before IRS processing. For claims already paid, voluntary disclosure programs offered reduced penalties for businesses that incorrectly claimed credits. You may also need to file adjusted employment tax returns and amend income tax returns to correct wage deductions. Given extended IRS audit authority on these claims, consulting a tax professional promptly is advisable.
