The COVID-19 pandemic created significant financial challenges for businesses across the United States. Government restrictions, reduced customer activity, and declining revenue forced many employers to make difficult decisions about their operations and workforce.
To help businesses retain employees during this period, Congress introduced the Employee Retention Credit (ERC) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. The program provided a refundable employment tax credit to eligible employers that continued paying qualified wages during the pandemic.
Although the ERC is no longer available for new claims under the ordinary filing deadlines, many businesses still have questions about previously filed claims, IRS reviews, and correcting potentially inaccurate filings.
This guide explains how the ERC worked, who qualified, how the credit was calculated, and what employers should know about the program today.
What Was the Employee Retention Credit?
The Employee Retention Credit, also called the Employee Retention Tax Credit (ERTC), was a refundable federal employment tax credit intended to help eligible businesses and tax-exempt organizations retain employees during the COVID-19 pandemic.
The program was introduced through the CARES Act and later expanded by additional legislation, including the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act.
Unlike a traditional loan, the ERC did not require repayment when properly claimed. However, eligibility depended on specific requirements involving business operations, gross receipts, qualified wages, and the relevant calendar quarter.
The credit generally applied to qualified wages paid between March 13, 2020, and September 30, 2021. Eligible recovery startup businesses could qualify for the fourth quarter of 2021 under separate rules.
Important: The ERC is a historical tax credit. Employers should be cautious of advertisements suggesting that any business can still submit a new claim or automatically receive a refund.
What Was the Purpose of the ERC?
The ERC was designed to reduce the financial burden on employers that continued paying workers despite the economic disruption caused by COVID-19.
Eligible businesses could use the credit to offset certain employment taxes and, where applicable, receive a refundable amount. The program was intended to encourage employers to maintain their workforce rather than lay off employees during periods of financial hardship.
The ERC was one of several federal relief measures introduced during the pandemic. Other programs included the Paycheck Protection Program (PPP), Economic Injury Disaster Loans (EIDL), and certain payroll tax deferrals.
Each program had its own eligibility and documentation rules.
Who Qualified for the Employee Retention Credit?
Eligibility depended on the applicable tax period and the employer’s circumstances. Generally, an employer had to meet at least one of the qualifying tests for the relevant quarter.
1. Full or partial suspension of business operations
A business could qualify if its operations were fully or partially suspended because of a qualifying COVID-19 government order that restricted commerce, travel, or group meetings.
The order had to apply to the employer’s operations and cause the required suspension. A voluntary business closure, a general decline in customer demand, or a supply-chain disruption alone did not automatically establish eligibility.
Employers relying on this test needed documentation identifying the applicable government order and explaining how it affected their business operations.
2. Significant decline in gross receipts
Businesses could also qualify if they experienced the required decline in gross receipts compared with the corresponding quarter in 2019.
The thresholds differed by year:
· 2020: Gross receipts generally had to fall below 50% of the receipts for the same quarter in 2019.
· 2021: Gross receipts generally had to be less than 80% of the receipts for the same quarter in 2019, representing a decline of more than 20%.
Special rules could apply when a business was not operating in 2019 or elected to use an alternative-quarter comparison for eligible 2021 periods.
Meeting the gross-receipts test for one quarter did not automatically establish eligibility for every quarter.
3. Recovery startup businesses
The American Rescue Plan Act introduced a special category for certain recovery startup businesses.
Generally, a qualifying business had to begin carrying on a trade or business after February 15, 2020, have average annual gross receipts of $1 million or less under the applicable rules, and not otherwise qualify under the suspension or gross-receipts tests.
Eligible recovery startup businesses could claim the ERC for the third and fourth quarters of 2021, subject to a combined credit limit of $50,000 per quarter per employer.
This exception did not extend the ERC program indefinitely. It applied only to the specified historical quarters.
How Much Was the Employee Retention Credit?
The maximum credit depended on the year in which qualified wages were paid.
Tax period
Credit rate
Wage limit
Maximum credit per employee
March 13–December 31, 2020
50%
$10,000 for the year
$5,000
First three quarters of 2021
70%
$10,000 per quarter
$7,000 per quarter
Eligible recovery startup businesses, fourth quarter of 2021
70%
Subject to applicable rules
Included within the $50,000 quarterly employer limit
For eligible employers, the maximum potential credit was $5,000 per employee for 2020 and up to $21,000 per employee for the first three quarters of 2021. Recovery startup businesses were subject to additional rules and limits for the fourth quarter.
These figures represent potential maximums, not guaranteed refunds. The actual credit depended on qualified wages, eligibility, employee-count rules, and coordination with other tax benefits.
Which Wages Counted Toward the ERC?
Qualified wages generally included certain wages and allocable employer-paid health plan expenses. However, not all compensation paid during the pandemic automatically qualified.
The rules also depended on the employer’s average number of full-time employees in 2019.
For 2020, employers generally used a threshold of more than 100 full-time employees. For 2021, the threshold increased to more than 500 full-time employees.
Employers at or below the applicable threshold could generally count qualified wages paid to employees during eligible periods, subject to the other requirements.
Larger employers generally could count wages paid to employees for periods when they were not providing services because of the qualifying suspension or business circumstances.
Other limitations applied. For example, employers could not use the same wages to claim the ERC and obtain forgiveness of a PPP loan or claim certain other tax benefits for those same wages.
Employers also had to consider related-party wage restrictions and applicable aggregation rules.
How Was the ERC Claimed?
Historically, eligible employers generally claimed the credit on their quarterly employment tax returns, usually Form 941. An employer that had already filed its return could seek an adjustment or refund by filing Form 941-X, subject to the applicable filing deadlines and legal requirements.
The credit was not a general deduction on an ordinary income tax return. It was an employment tax credit with its own eligibility rules and reporting procedures.
Employers claiming the ERC also generally had to reduce their wage deduction for income tax purposes by the amount of the credit attributable to those wages. Depending on the circumstances, this could require an amended income tax return.
Can businesses still file new ERC claims?
Generally, the ordinary deadlines to file new ERC refund claims have passed.
The usual deadlines were April 15, 2024, for 2020 quarters and April 15, 2025, for 2021 quarters. In addition, legislation enacted in July 2025 specifically prevents the IRS from allowing or refunding ERC claims for the third and fourth quarters of 2021 if those claims were filed after January 31, 2024.
That restriction applies even if a business otherwise believes it met the eligibility requirements. Claims filed by the applicable deadline may still be subject to IRS processing and review.
Because special circumstances can affect filing periods and the treatment of an existing claim, employers should review the relevant IRS notices and their own filing records before taking action.
Is the ERC Advance Payment Option Still Available?
No. The advance-payment procedures that existed during the ERC program are no longer available for new ERC claims.
Historically, certain eligible employers could use Form 7200 to request an advance of eligible employment tax credits. Employers also had procedures for reducing employment tax deposits and reconciling the amounts on their payroll tax returns.
These procedures applied during the program’s active period. They should not be treated as a current method for obtaining an ERC payment.
Employee Retention Credit vs. Paycheck Protection Program
The ERC and the Paycheck Protection Program were separate pandemic-relief measures.
The PPP provided qualifying businesses with loans that could be forgiven if program conditions were met. The ERC provided a refundable employment tax credit to eligible employers that paid qualified wages during qualifying periods.
Legislation enacted in late 2020 allowed eligible employers to benefit from both programs. However, the same wages could not be used for both PPP loan forgiveness and the ERC.
Employers also needed to account for certain other grants and tax credits when determining which wages qualified. Proper documentation was essential to avoid claiming multiple benefits on the same expenses.
ERC Example: How the Credit Worked
Consider a hypothetical business owner who employed one worker during an eligible quarter in 2021.
The employee received $2,000 in weekly wages and $200 in weekly employer-paid health benefits. Assuming 12 weeks of eligible compensation, the total would be:
· Wages: $2,000 × 12 = $24,000
· Health benefits: $200 × 12 = $2,400
· Total compensation before applying the ERC wage limit: $26,400
For 2021, qualified wages were generally capped at $10,000 per employee per quarter. If the employee’s full $10,000 wage limit was eligible and the business met all applicable requirements, the potential credit would be:
$10,000 × 70% = $7,000
The business could not claim 70% of the entire $26,400 because the per-employee wage limit applied. The calculation also assumes the wages were not used for another prohibited benefit and that the business satisfied the eligibility requirements for that quarter.
This example illustrates the historical calculation method; it does not establish eligibility for a new claim today.
IRS ERC Withdrawal and Voluntary Disclosure Options
The IRS increased its scrutiny of ERC claims after identifying improper claims and aggressive marketing by some promoters. Employers that claimed the credit without meeting the requirements may face repayment obligations, interest, penalties, or other compliance consequences.
The IRS established programs to help some employers correct the situation. However, those programs had specific deadlines.
ERC claim withdrawal process
The IRS withdrawal process allows certain employers to request that an unpaid ERC claim not be processed. It may still be available for eligible claims that have not been paid, including certain claims for which a refund check has not been cashed or deposited.
Eligibility depends on the type and status of the filing. The withdrawal process generally cannot be used to withdraw only part of a claim or to reverse a refund that has already been cashed or deposited.
Employers should review the IRS’s current withdrawal instructions before submitting a request.
ERC Voluntary Disclosure Program
The IRS’s second ERC Voluntary Disclosure Program closed on November 22, 2024. It is no longer open for new applications.
Under that program, certain employers who had received ERC funds for 2021 periods but were not entitled to the credit could apply to repay 85% of the amount received, subject to the program’s conditions.
Because the program has closed, employers should not assume they can still apply under its former terms. Businesses that received an improper refund should consult the IRS’s current guidance and a qualified tax professional about available options.
How Businesses Can Respond to an ERC Review
Employers with an existing ERC claim should keep records supporting the claim and respond promptly to IRS correspondence.
Useful documentation may include:
· Quarterly gross-receipts calculations and supporting financial statements
· Applicable government orders and explanations of their impact on operations
· Payroll registers and employee wage records
· Employer-paid health plan expense records
· PPP loan forgiveness documentation and other tax-credit calculations
· Copies of Forms 941 and 941-X, refund checks, and IRS notices
· Records showing how the credit affected the employer’s income tax deductions
If the IRS disallows a claim, the employer should review the notice carefully. Depending on the reason for disallowance, the taxpayer may have administrative appeal rights or other response options.
Avoid relying solely on a promoter’s eligibility calculation or a promise of a large refund. The employer remains responsible for the accuracy of the claim.
Final Thoughts
The Employee Retention Credit was an important source of pandemic-era support for eligible employers that continued paying employees during qualifying periods. Its rules varied by year, business circumstances, employee count, and the type of wages paid.
Today, the focus is primarily on understanding existing claims, responding to IRS reviews, correcting errors, and maintaining adequate documentation. Most ordinary filing deadlines have passed, and the IRS’s voluntary disclosure program is closed.
Contnow Tax Preparation LLC can help businesses understand tax preparation requirements and identify issues to review with a qualified tax professional. Businesses with an ERC claim should verify their eligibility, review the applicable IRS guidance, and obtain professional advice before submitting corrections or responding to an IRS notice.
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