The ERC credit, formally the Employee Retention Credit, is a refundable payroll tax credit Congress created in 2020 to help employers keep workers on payroll during the COVID-19 pandemic. At its maximum, it was worth up to $26,000 per employee across the 2020 and 2021 tax years. Filing windows for all eligible quarters have now closed, but the credit still matters in 2026: the IRS is working through a backlog of previously filed claims, auditing paid claims under an extended statute of limitations, and many employers who received refunds still have unresolved income tax consequences on their returns.
What the Credit Was Worth
The rules changed sharply between 2020 and 2021, and treating the two years as separate programs is the cleanest way to keep the math straight.
For 2020, the credit equaled 50% of up to $10,000 in qualified wages per employee for the entire year, capping the credit at $5,000 per employee.1Internal Revenue Service. Employee Retention Credit – 2020 vs 2021 Comparison Chart For 2021, Congress increased the credit to 70% of up to $10,000 in qualified wages per employee per quarter, raising the ceiling to $7,000 per employee per quarter.2Internal Revenue Service. Employee Retention Credit Most employers could claim the credit for the first three quarters of 2021, producing a 2021 maximum of $21,000 per employee. Combined with the 2020 cap, that is where the $26,000 total figure comes from.
Qualified wages include gross pay plus the employer’s share of health plan costs that are excluded from the employee’s income. Which wages counted depended on employer size, measured by average full-time employees in 2019. Under the 2020 rules, employers with 100 or fewer full-time employees could treat all wages during an eligible quarter as qualified, whether or not the employees were actively working; larger employers could only count wages paid for time not worked. For 2021, that size threshold rose to 500 full-time employees, pulling many mid-sized businesses into the more generous calculation.1Internal Revenue Service. Employee Retention Credit – 2020 vs 2021 Comparison Chart
Who Qualified
An employer needed to satisfy one of two tests for a given quarter. Meeting both was not required.
Government Order Suspension
The first path was a full or partial suspension of operations from a government order related to COVID-19, including orders limiting commerce, travel, or group meetings.1Internal Revenue Service. Employee Retention Credit – 2020 vs 2021 Comparison Chart A full suspension is simple: the government ordered you closed and you closed. Partial suspensions were more common and more contested. A restaurant limited to takeout, a retailer capped at reduced capacity, or a manufacturer that lost access to a key supplier because of border restrictions could all qualify.
The IRS uses a “more than nominal” standard here. The order must have caused at least a 10% reduction in the affected part of the business, measured either by gross receipts from that portion or by employee hours devoted to it.3Internal Revenue Service. Frequently Asked Questions About the Employee Retention Credit Minor changes like mask requirements or one-way aisles did not clear that bar. This is one of the main places aggressive claims broke down, and it remains a central audit issue.
Gross Receipts Decline
The second path was a significant drop in gross receipts compared with the same calendar quarter of 2019. The threshold was different for each year:
- For 2020, eligibility began in a quarter when gross receipts fell below 50% of the same quarter in 2019 and continued until the first quarter after receipts exceeded 80% of the 2019 baseline.1Internal Revenue Service. Employee Retention Credit – 2020 vs 2021 Comparison Chart
- For 2021, the threshold loosened to a 20% decline (receipts less than 80% of the 2019 quarter). Employers could also use the immediately preceding quarter’s receipts instead of the current quarter for the comparison.3Internal Revenue Service. Frequently Asked Questions About the Employee Retention Credit
Recovery Startup Businesses
A separate category covered businesses that began operating after February 15, 2020, and had average annual gross receipts of $1 million or less for the three years before the claimed quarter. Recovery startups did not need to show a suspension or a revenue decline.3Internal Revenue Service. Frequently Asked Questions About the Employee Retention Credit Two limits applied: they could only claim the credit for the third and fourth quarters of 2021, and the credit was capped at $50,000 per quarter rather than calculated per employee.
Coordination With PPP Loans
Payroll costs used to obtain Paycheck Protection Program (PPP) loan forgiveness cannot also be used for the ERC. Any wages reported to the Small Business Administration to secure PPP forgiveness are ineligible for the credit.3Internal Revenue Service. Frequently Asked Questions About the Employee Retention Credit Section 3134 codifies the same rule for the 2021 quarters, excluding wages tied to a covered PPP loan or certain other pandemic relief grants.4Office of the Law Revision Counsel. 26 U.S. Code 3134
Wages beyond the amount used for PPP forgiveness can still qualify. That makes clean allocation records essential. Using the same payroll dollars for both programs is one of the clearest red flags in IRS audits, and the documentation needs to survive long after a claim is filed.
The Income Tax Consequence Many Employers Miss
Claiming the ERC reduces the wage expense you can deduct on your income tax return for the year the qualified wages were paid.3Internal Revenue Service. Frequently Asked Questions About the Employee Retention Credit The reasoning: you cannot deduct an expense you have a right to be reimbursed for. If you claimed a $7,000 credit based on $10,000 in qualified wages, your deductible wage expense drops by $7,000. This partially offsets the credit, and skipping the adjustment produces an income tax underpayment.5Office of the Law Revision Counsel. 26 U.S. Code 280C – Certain Expenses for Which Credits Are Allowable
If you filed your 2020 or 2021 income tax return without reducing the wage deduction and the IRS later paid your ERC claim, you have two ways to fix it. You can amend the income tax return for the year the wages were paid, or you can report the overstated wage amount as gross income on the return for the year you actually received the ERC refund. The IRS has said the second approach is acceptable, and for most employers it is simpler because it avoids reopening a prior-year return.3Internal Revenue Service. Frequently Asked Questions About the Employee Retention Credit Either way, if you received a refund and never adjusted your income tax, that is an open issue.
How Claims Were Filed and When the Windows Closed
Claims are made on Form 941-X, the amended version of the quarterly employment tax return, with a separate form for each quarter claimed. The form now supports electronic filing through the IRS Modernized e-File system.6Internal Revenue Service. Instructions for Form 941-X (04/2025)
The general deadline for 2020 quarters was April 15, 2024, and for 2021 quarters was April 15, 2025, following the three-year statute of limitations for refund claims on amended employment tax returns.7Internal Revenue Service. Time You Can Claim a Credit or Refund The One Big Beautiful Bill Act, signed July 4, 2025, then imposed a further limit. Under Section 70605(d), the IRS cannot allow or refund ERC claims for the third and fourth quarters of 2021 if those claims were filed after January 31, 2024. Even claims that were technically within the three-year rule will not be paid if they crossed that cutoff. The one exception: claims filed after January 31, 2024, that the IRS had already refunded or credited before July 4, 2025, are not clawed back.8Internal Revenue Service. IRS Frequently Asked Questions (FAQs) Address Employee Retention Credits Under ERC Compliance Provisions of the One Big Beautiful Bill
Records to keep accessible include payroll records showing qualified wages and health plan allocations, copies of the government orders you relied on with specific dates and restrictions, quarterly financials supporting a gross receipts decline, and documentation splitting wages between PPP forgiveness and the ERC.
Where Things Stand in 2026
Processing and Interest
The IRS imposed a moratorium on new claims filed after September 14, 2023, citing widespread fraud concerns. It has since resumed working through claims filed between that date and January 31, 2024, prioritizing the highest-risk and lowest-risk claims first.3Internal Revenue Service. Frequently Asked Questions About the Employee Retention Credit Mid-risk claims sit under additional review, and processing times remain unpredictable, with some employers waiting well over a year.
Approved refunds carry interest. It accrues from the later of the original return’s due date or the date the tax was paid, with a 45-day administrative window before interest starts.9Internal Revenue Service. Interest For the first quarter of 2026, the overpayment interest rate is 7% for non-corporate taxpayers and 6% for corporations.10Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026
Audits Under an Extended Clock
The One Big Beautiful Bill Act extended the IRS audit statute of limitations for third and fourth quarter 2021 ERC claims to six years, giving the agency until at least 2027 to examine them.11Internal Revenue Service. One, Big, Beautiful Bill Provisions The IRS has been active in identifying improper claims, and employers who received the credit should keep all supporting records well into that window.
Withdrawing a Claim
Withdrawal is still available for employers whose ERC claims have not yet been paid. To qualify, the adjusted return must have been filed solely to claim the ERC with no other adjustments, and the employer must want to withdraw the entire claim. The process involves marking “Withdrawn” on a copy of the adjusted return, having an authorized person sign and date it, and faxing it to the IRS ERC claim withdrawal line at 855-738-7609. If the claim is already under audit, the withdrawal goes to the assigned examiner instead.12Internal Revenue Service. Help for Businesses: Steps for Withdrawing an Employee Retention Credit Claim
Employers who received a refund check but have not cashed it can still withdraw by voiding the check, attaching a note that says “ERC Withdrawal,” and mailing both with the signed withdrawal request to the Cincinnati Refund Inquiry Unit. The second Voluntary Disclosure Program, which let employers repay 85% of the credit received and keep 15%, closed on November 22, 2024, and is no longer an option.13Internal Revenue Service. Employee Retention Credit – Voluntary Disclosure Program Withdrawing a fraudulent claim does not shield the employer from criminal investigation.