An ERC check is a refund from the IRS for the Employee Retention Credit, a refundable payroll tax credit created during the COVID-19 pandemic for businesses that kept employees on payroll through government-ordered shutdowns or significant revenue declines. The credit applied to wages paid between March 13, 2020, and December 31, 2021, and was worth up to $26,000 per employee across that period.1Internal Revenue Service. Employee Retention Credit – 2020 vs 2021 Comparison Chart Filing deadlines have now passed, and the IRS reported closing nearly all of its roughly 5 million ERC claims by the end of 2025.2Internal Revenue Service. Frequently Asked Questions About the Employee Retention Credit If a check has arrived, the money is yours to keep provided the claim was valid, but the payment carries income tax consequences you have to act on.
What the Check Actually Represents
The payment is not a grant and not a loan. It is a refund of federal payroll taxes your business already paid. The Employee Retention Credit was created under Section 2301 of the CARES Act, then expanded by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021.3Internal Revenue Service. Coronavirus Tax Relief for Businesses and Tax-Exempt Entities It offsets the employer’s share of Social Security taxes on qualified wages, and because it is fully refundable, the IRS pays the difference directly to the business when the credit exceeds the payroll tax liability for a quarter.
Treasury sends the funds either as a paper check or a direct deposit. Paper checks go out when more than three electronic refunds have already been deposited to a single bank account, when the bank rejects the deposit, or when no direct deposit information is on file.4Internal Revenue Service. Get Your Refund Faster: Tell IRS to Direct Deposit Your Refund to One, Two, or Three Accounts The amount typically includes interest that accrued during the long processing period, and that interest has its own tax treatment covered below.
Why Your Business Received One
An ERC claim on your employer identification number was approved for one or more calendar quarters in 2020 or 2021. Businesses qualified through one of two paths:
- A federal, state, or local government order that fully or partially suspended operations, where the restriction had more than a nominal effect (defined by the IRS as at least a 10 percent reduction in the ability to provide goods or services, or a 10 percent share of gross receipts from the affected part of the business).
- A significant decline in gross receipts compared to the same quarter in 2019 — below 50 percent for 2020 quarters, and below 80 percent for 2021 quarters.1Internal Revenue Service. Employee Retention Credit – 2020 vs 2021 Comparison Chart
The credit was worth 50 percent of up to $10,000 in qualified wages per employee for all of 2020 (a $5,000 per-employee cap), and 70 percent of up to $10,000 per employee per quarter for the first three quarters of 2021 (a $7,000 per-employee quarterly cap, $21,000 for the year for most employers).5Treasury.gov. COVID-19 Business Support Employee Retention Credit If the amount of your check does not match what you or your preparer calculated, pull the Form 941-X filed for each quarter to see what the IRS approved.
What You Have to Do After Receiving the Check
Cashing the check is only the first step. Federal law requires you to reduce your wage deduction on your income tax return by the exact amount of the credit. This rule sits in Section 2301(e) of the CARES Act for 2020 wages and in 26 U.S.C. § 3134(e) for 2021 wages, and it prevents a double benefit — deducting the full wage expense while also receiving a tax-free refund for the same wages.6Internal Revenue Service. Guidance on the Employee Retention Credit Under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act7Internal Revenue Service. Guidance on the Employee Retention Credit Under Section 3134 of the Code The reduction applies to the tax year the wages were originally paid, not the year the refund arrived.
For most recipients, that means filing an amended income tax return for 2020, 2021, or both. Corporations use Form 1120-X; partnerships generally file an administrative adjustment request.8Internal Revenue Service. About Form 1120-X, Amended U.S. Corporation Income Tax Return The IRS also allows an alternative for businesses that received the credit in a later year without adjusting the original return: you can include the overstated wage amount as gross income on the return for the year you received the credit, rather than amending the prior year.2Internal Revenue Service. Frequently Asked Questions About the Employee Retention Credit Skipping the adjustment altogether can lead to penalties and interest if the IRS finds the discrepancy.
Then there is the interest on the check itself. That interest is taxable income in the year you receive it. If a refund arrived in 2025 with $2,000 of interest included, that $2,000 goes on the 2025 return, separate from the wage deduction adjustment for the underlying credit.
Records to Keep
Hold onto everything that supports the claim. The IRS requires businesses to keep records for at least six years for wages paid after June 30, 2021, and at least four years for earlier employment tax records.9Internal Revenue Service. Employment Tax Recordkeeping A special five-year statute of limitations applies to ERC claims for the third quarter of 2021 under Section 3134(l) of the Internal Revenue Code. Keep the payroll journals, copies of the original Form 941 and the Form 941-X, the government orders that affected your operations, and quarterly revenue documentation. Given continued IRS scrutiny of the program, holding these records past the minimum period is a sensible safeguard.
If You Now Think the Claim Was Wrong
Improper ERC filings were widespread, largely driven by third-party promoters, and the IRS has aggressively pursued incorrect claims.10Internal Revenue Service. Businesses Should Review Employee Retention Credit Rules and Resolve Incorrect Claims Soon You are responsible for what was filed under your EIN, regardless of who prepared it. Two common signs of a bad claim: wages that were already used for PPP loan forgiveness (the same wages cannot count for both) and eligibility based on vague pandemic disruption rather than a specific government order or documented revenue drop.2Internal Revenue Service. Frequently Asked Questions About the Employee Retention Credit
Your options depend on where the claim stands:
- If the claim has not yet been paid, or the check arrived but has not been cashed, and the Form 941-X was filed solely for the ERC with no other adjustments, you can withdraw the claim. Make a copy of the filed return, write “Withdrawn” in the left margin, have an authorized person sign and date the right margin, and fax it to the IRS ERC withdrawal line at 855-738-7609, or mail it to the address in the Form 941-X instructions.11Internal Revenue Service. Help for Businesses: Steps for Withdrawing an Employee Retention Credit Claim
- If your claim is already under audit, do not use the withdrawal fax line. Work through your assigned examiner or the audit notice.
- If you have already cashed the check, the Voluntary Disclosure Program that let businesses repay 85 percent without penalties or interest is closed. The second round ended on November 22, 2024. Consult a tax professional about repayment; the IRS can assess the tax, penalties, and interest, and pursue fraud in serious cases.12Internal Revenue Service. Employee Retention Credit – Voluntary Disclosure Program
One boundary worth stating clearly: the filing window is closed. The deadline for 2020 quarters was April 15, 2024, and for 2021 quarters it was April 15, 2025. Anyone contacting you now offering to file a new ERC claim is either mistaken or running a scam.