COVID-19 Employer Tax Incentives: ERC, FFCRA, and COBRA

The federal government responded to the pandemic with four separate COVID-19 employer tax incentives: the Employee Retention Credit, the paid leave credits under the Families First Coronavirus Response Act, the COBRA premium assistance credit, and a deferral of the employer share of Social Security tax. Each targeted a different payroll pressure, each had its own eligibility rules and dollar caps, and only one — the ERC — still generates meaningful activity today, largely through IRS audits, disallowance letters, and legislative cutoffs on late-filed claims.

The Employee Retention Credit

The ERC was by far the largest of the four programs. It was a refundable credit against the employer’s share of Social Security tax, paid to businesses that kept workers on payroll during government-ordered shutdowns or significant revenue declines. Section 2301 of the CARES Act created it for wages paid between March 13, 2020, and December 31, 2020.¹ Congress extended it into 2021 through Internal Revenue Code Section 3134, then the Infrastructure Investment and Jobs Act cut it off after September 30, 2021, for most employers. Only “recovery startup businesses” — those that began operations after February 15, 2020, with average annual gross receipts under $1 million — could claim the credit for Q4 2021, capped at $50,000 for the quarter.²

Eligibility in 2020 Versus 2021

In 2020, an employer qualified by showing either a full or partial suspension of operations under a government order, or a quarterly gross receipts drop below 50 percent of the same quarter in 2019.¹ The 2021 gross receipts test was much easier to meet: quarterly revenue only needed to fall below 80 percent of the 2019 comparison quarter, so a decline of just over 20 percent qualified.²

How Much the Credit Was Worth

The 2020 credit equaled 50 percent of qualified wages, with a $10,000 wage cap per employee for the entire year. Maximum credit: $5,000 per employee.¹ In 2021, the rate rose to 70 percent, and the $10,000 wage cap applied per quarter. An employer eligible for all three available 2021 quarters could claim up to $7,000 per employee per quarter, or $21,000 per employee for the year.²

Small Employer Versus Large Employer

The line between “small” and “large” mattered because it decided which wages counted. In 2020, an employer with 100 or fewer average full-time employees in 2019 could count wages paid to every employee, working or not. Anyone above that threshold could only count wages paid to employees who were not providing services. For 2021, the small employer threshold jumped to 500 full-time employees, sweeping in many mid-sized businesses.³

Health coverage counts too. Employer-paid health insurance premiums, including amounts paid through pre-tax employee salary reductions, qualify as part of the wage calculation; after-tax employee contributions do not.⁴

FFCRA Paid Leave Credits

The Families First Coronavirus Response Act took a narrower approach. Rather than subsidizing payroll broadly, it reimbursed small and mid-sized employers for the cost of mandated paid sick and family leave tied to COVID-19. The credits under Sections 7001 and 7003 covered wages paid to an employee who could not work because of a quarantine order, a healthcare provider’s isolation advice, COVID symptoms while seeking a diagnosis, or the closure of a child’s school or care facility.⁵

Daily caps depended on the reason. Leave for the employee’s own quarantine or illness was reimbursed up to $511 per day for up to ten days. Leave to care for someone else, or because a child’s school or care facility was closed, was capped at $200 per day.⁶ Expanded family leave allowed up to an additional ten weeks at the $200 daily rate for childcare-related absences. The credits also covered the employer’s share of Medicare tax on qualifying wages and allocable health plan expenses.

The paid leave mandate expired at the end of 2020. Congress kept the tax credits alive on a voluntary basis through September 30, 2021, under the American Rescue Plan Act. Employers who continued offering the leave after the mandate ended could still claim the credits.

COBRA Premium Assistance Credit

The American Rescue Plan Act, through Section 9501, temporarily eliminated the cost of COBRA continuation coverage for workers who lost their insurance involuntarily. Eligible individuals paid nothing for COBRA premiums between April 1, 2021, and September 30, 2021, while employers received a dollar-for-dollar credit for the full premium, including the standard 2 percent administrative fee.⁷

Eligibility was limited to individuals who lost coverage because of involuntary termination or a reduction in hours. Voluntary quits were excluded.⁸ People who had earlier declined or dropped COBRA got a second enrollment window.

The credit offset the employer’s 1.45 percent Medicare tax rather than Social Security tax. If the credit exceeded the Medicare tax owed for the quarter, the excess was treated as a refundable overpayment, so even employers with small Medicare tax liabilities could recover the full premium cost.⁷

Social Security Tax Deferral

Section 2302 of the CARES Act was not a credit. It was a cash-flow tool that let employers delay depositing the 6.2 percent employer share of Social Security tax on wages paid between March 27, 2020, and December 31, 2020.⁹ The deferred tax was still owed. Half was due by December 31, 2021, and the remainder by December 31, 2022.

Missing either deadline was expensive. A late payment did not just draw penalties on the delinquent portion; it invalidated the deferral on the entire balance. Under the failure-to-deposit rules, the penalty was 10 percent of the full deferred amount if the failure lasted more than 15 days, rising to 15 percent if the employer did not pay within 10 days of an IRS demand notice.¹⁰

How the Programs Interact

The four incentives overlapped in time, and Congress wrote rules to prevent stacking. Getting this wrong is a common source of exposure.

ERC and PPP Loans

The CARES Act originally barred ERC claims by any employer that received a PPP loan. Congress reversed that in late 2020, but with a substitute rule: wages counted toward PPP loan forgiveness cannot also be counted as qualified wages for the ERC.¹¹ Employers who received PPP forgiveness need to carve out the payroll reported on the forgiveness application before running the ERC calculation. Because the minimum payroll allocation for PPP forgiveness was 60 percent of the loan, wages above that threshold may still qualify for the ERC.

Wage Deduction Reduction

The ERC is not a pure windfall. Employers must reduce their income tax deduction for wages by the amount of the ERC received. Claim $100,000 in ERC and $100,000 of otherwise deductible wage expense disappears from the income tax return.¹¹ Skipping this adjustment can produce an income tax deficiency separate from any ERC dispute. The same reduction applies to the FFCRA paid leave credits.

Aggregation of Related Businesses

Related companies do not multiply their benefits. Parent-subsidiary and brother-sister controlled groups are treated as a single employer for ERC purposes. That means the gross receipts test, the small-versus-large employee count, and the per-employee wage caps all apply across the combined group, and an employee working for two related entities counts only once. It cuts both ways: if one entity in the group meets the eligibility test, the others may qualify too, which helps when one subsidiary had the revenue decline and another had the larger payroll.

How Employers Claim or Amend

All four programs run through the employer’s quarterly employment tax return, Form 941.¹² Employers who claimed the credits on their original returns received the benefit as a reduction in their deposit obligations. Anyone who missed a credit at the time must amend using Form 941-X.¹³

Advance-payment requests on Form 7200 are no longer available. The last day to submit that form was January 31, 2022.¹⁴ Refunds from Form 941-X are paid by paper check mailed to the employer’s address on file; direct deposit is not offered, and processing has run well past a year on many claims.

Where Things Stand Now

For most employers, the live question is no longer how to claim these credits but whether existing claims will hold up. The IRS has treated the ERC as a major enforcement priority after aggressive marketing by third-party promoters pushed ineligible businesses to file.

The 2025 Cutoff on Late-Filed ERC Claims

Legislation enacted in 2025 imposed a hard cutoff on certain claims. Under Section 70605(d) of the One Big, Beautiful Bill, the IRS is prohibited from allowing or refunding ERC claims for Q3 and Q4 of 2021 if the return was filed after January 31, 2024, and the refund had not already been issued before July 4, 2025. Claims for those quarters filed before that January 2024 date are unaffected, and refunds already paid before July 4, 2025, are grandfathered.¹⁵

Withdrawing a Pending Claim

Employers with unprocessed ERC claims they want to retract can still use the IRS withdrawal process. Write “Withdrawn” on a copy of the filed Form 941-X, have an authorized person sign and date it, and fax it to 855-738-7609. Withdrawn claims are treated as if they were never filed, with no penalties or interest.¹⁶ An employer that received a refund check but has not cashed it can void the check and return it with the withdrawal request. The separate Voluntary Disclosure Program for repaying a portion of received ERC refunds closed on November 22, 2024, and is not accepting new applications.¹⁷

Audit Window

The American Rescue Plan Act gave the IRS a five-year assessment window on 2021 ERC claims, longer than the standard three years. Those claims remain exposed to audit through at least 2026 or 2027, depending on the filing date. Anyone who incorrectly claimed the ERC must repay it, potentially with penalties and interest, and fraudulent claims can lead to criminal investigation.¹¹

Side-by-Side Comparison

Employee Retention Credit. Refundable credit worth up to $5,000 per employee for 2020 and up to $21,000 per employee for 2021 (Q1–Q3). Offsets the employer share of Social Security tax. Requires a government-ordered suspension or a measurable decline in gross receipts. Retroactive claims via Form 941-X are still subject to IRS processing and the 2025 legislative restrictions.
FFCRA Paid Leave Credits. Refundable credit reimbursing mandated COVID sick and family leave wages, capped at $511 or $200 per day depending on the reason. Mandatory leave ended December 31, 2020; voluntary credits ran through September 30, 2021.
COBRA Premium Assistance Credit. Refundable credit for 100 percent of COBRA premiums for workers who lost coverage involuntarily, effective April 1 through September 30, 2021. Offsets the employer’s Medicare tax. The narrowest of the four in both scope and duration.
Social Security Tax Deferral. Not a credit. A cash-flow deferral of the 6.2 percent employer Social Security tax on wages paid March through December 2020, with full repayment required by the end of 2022 and steep penalties for late payment.

The ERC dwarfs the other three in dollar value and in ongoing complexity, and it is the program most likely to generate continuing IRS correspondence. Employers who claimed any of these incentives should keep the supporting records — gross receipts, government shutdown orders, payroll detail by employee, and documentation that wages used for PPP forgiveness were excluded from the ERC calculation — for at least the duration of the extended assessment window.

1
Congress.gov. H.R. 748 – Coronavirus Aid, Relief, and Economic Security Act
2
Office of the Law Revision Counsel. 26 USC 3134 – Employee Retention Credit for Employers Subject to Closure Due to COVID-19
3
Internal Revenue Service. Employee Retention Credit – 2020 vs 2021 Comparison Chart
4
Internal Revenue Service. Determining the Amount of Allocable Qualified Health Plan Expenses
5
Internal Revenue Service. COVID-19-Related Tax Credits for Paid Leave Provided by Small and Midsize Businesses FAQs
6
Congress.gov. Public Law 116-127 – Families First Coronavirus Response Act
7
Internal Revenue Service. Notice 2021-31 – Premium Assistance for COBRA Benefits
8
Department of Labor. FAQs About COBRA Premium Assistance Under the American Rescue Plan Act of 2021
9
Internal Revenue Service. Deferral of Employment Tax Deposits and Payments Through December 31, 2020
10
Internal Revenue Service. Penalty for Failure to Deposit Taxes Deferred Under CARES Act Section 2302(a)(2)
11
Internal Revenue Service. Frequently Asked Questions About the Employee Retention Credit
12
Internal Revenue Service. About Form 941 – Employers Quarterly Federal Tax Return
13
Internal Revenue Service. Instructions for Form 941
14
Internal Revenue Service. Form 7200 – Advance Payment of Employer Credits Due to COVID-19
15
Internal Revenue Service. IRS FAQs – Employee Retention Credits Under ERC Compliance Provisions of the One Big Beautiful Bill
16
Internal Revenue Service. Withdraw an Employee Retention Credit (ERC) Claim
17
Internal Revenue Service. Employee Retention Credit – Voluntary Disclosure Program