The Employee Retention Credit (ERC) was a refundable payroll tax credit for businesses that retained employees during qualifying quarters of 2020 and 2021 despite COVID-19 disruptions. The credit program is now closed to new original claims; the IRS has aggressive audit and fraud enforcement underway for 2024–2026.
The ERC was created by the CARES Act (March 2020) and expanded by subsequent legislation (Consolidated Appropriations Act 2021, American Rescue Plan 2021). In its final form, the credit was worth up to $5,000 per employee for 2020 and up to $21,000 per employee for 2021 (Q1–Q3) — up to $26,000 per employee total for businesses that qualified in all periods. To qualify, businesses needed to meet one of two tests for each qualifying quarter: (1) a significant decline in gross receipts (50%+ decline vs. same quarter 2019 for 2020; 20%+ decline for 2021), or (2) a full or partial suspension of business operations due to a government order related to COVID-19. The second test — government order suspension — became the primary basis for many aggressive ERC claims filed by promoters. The Infrastructure Investment and Jobs Act (November 2021) retroactively ended ERC eligibility for Q4 2021 for most businesses. The IRS stopped processing new ERC claims for the moratorium period in September 2023 due to concerns about widespread fraud — an estimated hundreds of thousands of improper claims were filed, many by ERC 'mills' that charged contingency fees to file claims for businesses that did not actually qualify. For businesses that filed ERC claims: the IRS has launched the ERC Voluntary Disclosure Program (for repayment of improper claims at 80% of the claim amount) and an ERC withdrawal program (for pending, unprocessed claims). Businesses that received ERC funds they may not have been entitled to face significant audit risk. Legitimate claims that passed IRS review have been paid. New original claims are no longer accepted for most businesses — consult a CPA and review IRS guidance at irs.gov/coronavirus/employee-retention-credit.
The deadline to file retroactive ERC claims via amended Form 941-X was April 15, 2025 for 2021 Q2 (three-year statute of limitations). The IRS had a moratorium on processing new claims from September 2023. As of 2025, any new claims are subject to intensive scrutiny. The IRS Voluntary Disclosure Program and withdrawal program closed their initial enrollment windows. If you have a pending claim, check irs.gov/coronavirus/employee-retention-credit for current status and consult a CPA — do not use ERC promotion firms.
The ERC itself is not included in gross income, but the business must reduce its deductible wage expense by the amount of ERC claimed — for the tax year in which the wages were paid. This means businesses that claimed ERC and didn't adjust their wage deductions may have understated taxable income and may owe additional tax. Amended returns may be required.
Consult a CPA or tax attorney immediately — not an ERC promoter. The IRS Voluntary Disclosure Program allowed businesses to repay improper ERC at 80% of the claim amount with reduced penalties; check irs.gov for current program availability. If you haven't cashed a refund check yet, the withdrawal program may be an option. Acting proactively significantly reduces penalty exposure compared to waiting for an IRS audit.