A business payroll tax refund in 2026 generally comes through one of two channels: an Employee Retention Credit claim already in the IRS pipeline, or an ordinary overpayment of FICA or federal employment taxes corrected on Form 941-X. New ERC filings are effectively closed. The One, Big, Beautiful Bill signed in 2025 bars the IRS from allowing or refunding any ERC for the third and fourth quarters of 2021 unless the claim was filed on or before January 31, 2024, and claims for 2020 and the first two quarters of 2021 were already past the standard three-year deadline for most businesses.1Internal Revenue Service. IRS FAQs Address Employee Retention Credits Under ERC Compliance Provisions of the One, Big, Beautiful Bill What’s left to do depends on where your business sits: waiting on a filed claim, fighting a denial, correcting a claim that shouldn’t have been filed, or recovering ordinary payroll tax overpayments that have nothing to do with the pandemic.
If Your ERC Claim Is Still Pending
The IRS imposed a moratorium on processing new ERC claims in September 2023 and never fully lifted it. As of February 2026, the IRS reported that it had resolved the bulk of the ERC backlog but still had roughly 41,000 claims in examination or appeal. Detailed status reporting has been scarce since the IRS stopped publicly updating ERC processing statistics in October 2024.
If a legitimate claim is still sitting unprocessed, two practical steps help. Pull your IRS account transcript through the online portal to see whether the claim has been processed, flagged for review, or denied. If the delay is causing real financial hardship, contact the Taxpayer Advocate Service.
If Your ERC Claim Was Denied
The IRS issued roughly 28,000 ERC disallowance notices during the summer of 2024, and more have followed. A denial arrives as Letter 105-C, and the deadlines that follow it are firm.
Administrative Appeal
You can request a review with the IRS Independent Office of Appeals. The IRS generally expects a protest within 30 days of the disallowance letter, though it has indicated you can request an appeal at any time within two years of the letter’s date.2Internal Revenue Service. Understanding Letter 105-C, Disallowance of the Employee Retention Credit Acting sooner is better, because a refund can only be issued inside that same two-year window.
Your protest should address the specific reason the IRS gave for the disallowance and attach evidence supporting at least one eligibility factor for each denied quarter. Send it to the address on the disallowance letter, not directly to the Appeals office. The examination team reviews the response first and may resolve the issue without ever sending it on.3Internal Revenue Service. Preparing a Request for Appeals If the amount at issue is $25,000 or less per quarter, a simplified small case request may be available instead of a full written protest.
Filing Suit in Court
Whether or not you pursue an administrative appeal, you have two years from the date on the disallowance letter to file suit in U.S. district court or the U.S. Court of Federal Claims. Requesting an Appeals review does not extend that deadline.4Taxpayer Advocate Service. Did You Receive a Notice of Claim Disallowance for Your Employee Retention Credit Refund Claim? You and the IRS can agree to extend the window by signing Form 907. For a large claim headed toward litigation, engage a tax attorney early enough to preserve that option.
If You Received ERC You Shouldn’t Have
Many businesses were pulled into ERC claims by aggressive promoters and later realized the eligibility story didn’t hold up. There are two paths to unwind a claim, and only one is still open.
Claim Withdrawal
If the IRS has not yet paid your claim, or sent a check you haven’t cashed, you can withdraw it entirely. Withdrawal is available only when the Form 941-X was filed solely to claim the ERC with no other adjustments, and you’re withdrawing the full amount.5Internal Revenue Service. Withdraw an Employee Retention Credit (ERC) Claim A withdrawn claim is treated as though it were never filed, and the IRS imposes no penalties or interest on the withdrawn amount.
The mechanics are simple. Copy the adjusted return, write “Withdrawn” in the left margin, have an authorized person sign and date it in the right margin, and fax it to 855-738-7609. If fax isn’t available, mail it to the address in the form instructions. Withdrawal does not protect against criminal investigation if the original filing was willfully fraudulent.5Internal Revenue Service. Withdraw an Employee Retention Credit (ERC) Claim
Voluntary Disclosure Is Closed
For businesses that already received and deposited an ERC refund they weren’t entitled to, the IRS ran two rounds of a Voluntary Disclosure Program. The second and final round closed on November 22, 2024. Participants had to repay 85% of the credit and sign a closing agreement; in exchange the IRS waived penalties and interest and agreed not to audit the resolved quarters.6Internal Revenue Service. Employee Retention Credit – Voluntary Disclosure Program The IRS has indicated there will not be a third program. Businesses that missed the VDP deadline and still hold credits they don’t qualify for face the full audit and penalty process.
Amend Your Income Tax Return After Receiving ERC
This step catches many businesses off guard, and skipping it creates its own tax bill. When you claim the ERC, you must reduce your wage deduction on your income tax return by the credit amount for the same tax period.7Internal Revenue Service. Employee Retention Credit A $100,000 ERC for 2020 drops your deductible wage expense for 2020 by $100,000 and increases your taxable income by the same amount. That usually means filing an amended income tax return: Form 1040 for sole proprietors, Form 1065 for partnerships, or Form 1120 for corporations.
The net benefit of the credit is still positive, because the ERC reduces payroll tax dollar-for-dollar while the income tax increase is only a fraction of the credit amount. Skipping the amendment, however, creates an underpayment that triggers penalties and interest. If you received an ERC refund and haven’t adjusted your income tax filings, do so now.
Payroll Tax Refunds Outside the ERC
Businesses overpay payroll taxes for ordinary reasons too, and those refund paths remain open. The employer portion of FICA runs 6.2% for Social Security and 1.45% for Medicare on each dollar of covered wages.8Office of the Law Revision Counsel. 26 USC 3111 – Rate of Tax Mistakes in applying those rates or the Social Security wage base limit are the most common sources of overpayment.
Common Overpayment Scenarios
- Math or data entry errors: incorrect wage totals on the original Form 941, accidental duplication of a tax deposit, or a miscalculation of the total liability.
- Exceeding the Social Security wage base: the Social Security tax applies only up to an annual wage ceiling that adjusts each year. If an employer keeps withholding and matching Social Security tax on wages above that limit, the excess is refundable.
- Misapplied exemptions for international workers: nonresident alien students and scholars on F-1, J-1, or M-1 visas who have been in the U.S. for fewer than five calendar years are generally exempt from Social Security and Medicare taxes on qualifying employment. If an employer withholds FICA from these workers in error, the employer should correct it. If the employer doesn’t issue a full refund, the worker can file Form 843 along with Form 8316 to claim the refund directly from the IRS.9Internal Revenue Service. Foreign Student Liability for Social Security and Medicare Taxes
One scenario does not generate a business refund even though it looks similar. When an employee works for multiple employers and their combined wages exceed the annual Social Security cap, the employee claims the excess on their individual Form 1040. Each employer correctly withheld on the wages they paid.
How To File
All non-ERC payroll tax overpayments are corrected on Form 941-X, the adjusted quarterly employment tax return.10Internal Revenue Service. About Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund File a separate 941-X for each quarter being corrected.11Internal Revenue Service. Instructions for Form 941-X The documentation burden is far lighter than for an ERC claim: for a plain math error, corrected payroll records and deposit receipts are usually enough. The completed form is signed and mailed to the designated IRS service center.
Audit Exposure and Records To Keep
If you’ve received an ERC refund, the IRS has made ERC enforcement a top priority, and the burden of proving the claim was valid falls on you. Sloppy records are the fastest way to lose a credit you legitimately earned.
Employment tax records must be retained for at least four years after filing. For ERC claims the IRS recommends keeping records for at least six years.12Internal Revenue Service. Employment Tax Recordkeeping Useful records include employee-level payroll detail showing how qualified wages were calculated; copies of any government orders you relied on and the internal analysis of how they limited operations; quarterly revenue comparisons against the corresponding 2019 quarters; PPP allocation worksheets proving no wage overlap between PPP forgiveness and the ERC; and documentation of employer-paid health plan costs included in the qualified wage figure.
The standard assessment period for the IRS to review and claw back an ERC refund is three years from the date the original return was filed or its due date, whichever is later. For the third and fourth quarters of 2021, Congress extended that window to five years under the American Rescue Plan Act, giving the IRS until at least 2027 to audit those claims.12Internal Revenue Service. Employment Tax Recordkeeping A claim involving fraud or a substantial overstatement has no time limit at all.
One category of claim fails on audit more than any other: wages paid to a majority owner (anyone owning more than 50% of a corporation’s stock, or more than 50% of the capital and profits interests in a partnership) generally do not count as qualified wages if that owner has any living relatives, and the exclusion extends to wages paid to the owner’s spouse, children, siblings, parents, in-laws, aunts, uncles, nieces, and nephews who work in the business.13Internal Revenue Service. Notice 2021-49 – Guidance on the Employee Retention Credit Closely held family businesses should audit their ERC calculations for this error before the IRS does.
Many of the firms that drove the wave of questionable ERC filings charged contingency fees of 15% to 30% of the credit and have since disappeared. The business, not the promoter, is legally responsible for any credit that turns out to be erroneous. A denial means repaying the full credit plus interest and potentially a 20% accuracy-related penalty; if the IRS determines fraud, the penalty jumps to 75%. For any claim large enough to matter, an independent review by a CPA or tax attorney is the single most cost-effective way to gauge audit risk before the IRS makes the first move.