If you are looking at how to apply for the ERC, the short answer is that you can’t anymore. The Employee Retention Credit ran on the standard three-year window for amending employment tax returns, and both deadlines have passed: April 15, 2024 for wages paid in 2020, and April 15, 2025 for wages paid during the first three quarters of 2021.1Internal Revenue Service. Frequently Asked Questions About the Employee Retention Credit There is no extension, no late-filing option, and no hardship exception. If you never filed, the credit is forfeited.
What remains is everything on the back end. Claims already submitted are still being processed. Claims that were filed wrong can be withdrawn. Refunds that shouldn’t have been paid can be returned through a formal program at a discount. And the IRS is actively auditing what it paid out.
What Applying Would Have Involved
ERC claims were submitted on Form 941-X, the Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.2Internal Revenue Service. About Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund A separate 941-X was required for each quarter claimed. The form corrected the original Form 941 filed for that quarter to reflect the credit amount.
For most of the program, Form 941-X had to be printed, signed, and mailed to the IRS service center for the business’s location. Electronic filing became available for some amended employment tax returns later in the program’s run.
Who Qualified
The Employee Retention Credit was a refundable payroll tax credit created by the CARES Act in March 2020 to help employers keep workers on payroll during the pandemic.3Internal Revenue Service. COVID-19-Related Employee Retention Credits: Overview A business qualified for a given quarter by meeting one of two tests.
The first was a government-order suspension. If a federal, state, or local order fully or partially shut down operations, the quarters covered by that order qualified. Partial counted. A restaurant that lost indoor dining but stayed open for takeout experienced a partial suspension.4Office of the Law Revision Counsel. 26 US Code 3134 – Employee Retention Credit for Employers Subject to Closure Due to COVID-19
The second test was revenue. For 2020 quarters, gross receipts had to fall by more than 50 percent against the same quarter in 2019. For 2021 quarters, the threshold was a 20 percent decline against the matching 2019 quarter.5U.S. Department of the Treasury. Employee Retention Credit Eligibility for Businesses Only one of the two tests needed to be met.
A narrower category, recovery startup businesses, applied only to the third and fourth quarters of 2021. These were businesses started on or after February 15, 2020, with average annual gross receipts under $1 million. Their credit was capped at $50,000 per quarter.4Office of the Law Revision Counsel. 26 US Code 3134 – Employee Retention Credit for Employers Subject to Closure Due to COVID-19
How the Credit Was Calculated
For 2020, the credit equaled 50 percent of qualified wages, up to $10,000 in wages per employee for the whole year. Maximum per employee: $5,000.5U.S. Department of the Treasury. Employee Retention Credit Eligibility for Businesses
For 2021, the rate rose to 70 percent, and the $10,000 wage cap applied per employee per quarter. That produced a maximum of $7,000 per employee per quarter, or up to $21,000 per employee across the three eligible quarters.6Internal Revenue Service. Employee Retention Credit 2020 vs 2021 Comparison Chart Qualified wages included the employer’s share of health insurance costs.
Employer size determined whose wages counted. In 2020, businesses with more than 100 full-time employees could only count wages paid to workers not providing services. In 2021, that threshold moved to 500. Smaller employers could count wages paid to all employees, working or not.6Internal Revenue Service. Employee Retention Credit 2020 vs 2021 Comparison Chart
A trap that caught many owners: businesses under common ownership were treated as a single employer for the headcount and gross receipts tests under the controlled group rules.7Internal Revenue Service. Controlled and Affiliated Service Groups Two 60-employee companies with the same owner counted as one 120-employee business.
One more limit mattered for anyone who also took a Paycheck Protection Program loan. Businesses could claim both the PPP and the ERC after Congress changed the rule in late 2020, but the same wages could not be used for PPP forgiveness and the ERC.3Internal Revenue Service. COVID-19-Related Employee Retention Credits: Overview Wages attributed to a forgiven PPP loan had to be excluded from the ERC calculation. Getting that allocation wrong is one of the most common issues the IRS flags on audit.
If Your Claim Is Still Pending
The IRS placed a moratorium on processing new ERC claims in September 2023 after identifying widespread fraud and improper filings pushed by aggressive marketing firms. The agency has since resumed working through claims in batches, prioritizing the highest-risk and lowest-risk filings first.8Internal Revenue Service. Employee Retention Credit
A pending claim over a year old is not unusual. These returns are processed manually, and the volume filed during 2022 and 2023 far exceeded normal capacity. When a claim is approved, the IRS mails a notice of adjustment followed by a paper refund check with interest for the delay.
Higher-risk claims can trigger a request for documentation. A Letter 105-C disallows a claim and explains the reason along with appeal rights. Responding promptly with supporting records is important if you believe the claim was valid. Keep payroll journals, copies of the government orders that restricted operations, quarterly profit-and-loss statements for 2019 and the claim year, and PPP allocation records. The IRS has up to five years to audit 2021 claims under the extended assessment period created by the American Rescue Plan Act, so audits can arrive well into 2026 and beyond.
If You Filed a Claim You Shouldn’t Have
The IRS offers a withdrawal process for claims that have not yet been paid. To qualify for withdrawal, all of the following must be true:9Internal Revenue Service. Withdraw an Employee Retention Credit (ERC) Claim
- The claim was filed on Form 941-X solely to claim the ERC, with no other adjustments.
- You want to withdraw the entire claim amount, not just reduce it.
- The IRS has not yet paid the claim, or you received a refund check but have not cashed or deposited it.
To withdraw, make a copy of the amended return, write “Withdrawn” in the left margin of the first page, have an authorized person sign and date the right margin, and fax the signed copy to the IRS ERC claim withdrawal fax line at 855-738-7609. A separate withdrawal request is needed for each tax period. If the claim is already under audit, work directly with the assigned examiner instead of using the fax line.
A withdrawn claim is treated as if it were never filed, and the IRS will not charge penalties or interest on it. Withdrawal does not shield you from criminal investigation if the original claim was filed fraudulently.
If You Already Received a Refund You Shouldn’t Have
For businesses that already received and deposited an ERC refund they were not entitled to, the IRS created a Voluntary Disclosure Program. Under it, you repay 85 percent of the credit. The IRS waives penalties and interest on the full amount as long as payment is made by the time the signed closing agreement is returned.10Internal Revenue Service. Employee Retention Credit – Voluntary Disclosure Program
The 15 percent kept is not treated as taxable income. In exchange, the business signs a closing agreement and agrees to cooperate with future information requests. A business that received $100,000 in ERC refunds it should not have claimed repays $85,000 under the program and avoids what could otherwise become a fraud investigation.
What Doing Nothing Costs
The IRS has made ERC fraud enforcement a priority. Intentionally claiming credits you were not entitled to can trigger the civil fraud penalty of 75 percent of the underpayment.11Internal Revenue Service. IRM 9.5.13 Civil Considerations – Section: 9.5.13.2.2.1 Fraud Penalty (26 USC 6663) Criminal prosecution for tax evasion carries up to five years in prison.12Internal Revenue Service. FS-2008-19 – Avoiding Penalties and the Tax Gap
Many improper claims were filed by third-party promoters who charged large contingency fees and made aggressive eligibility promises. The IRS does not consider reliance on a promoter a defense against penalties. If your business signed up with a firm that guaranteed you qualified without reviewing the financials, that claim deserves a second look while the withdrawal and voluntary disclosure options are still available. Both require you to act before the IRS does.