Employee Retention Credit (ERC)

The employee retention credit was a refundable payroll tax credit enacted in the CARES Act to encourage employers to retain employees during the COVID-19 pandemic. For 2020 it equaled 50 percent of up to $10,000 in qualified wages per employee for the year. For 2021 it was expanded substantially to 70 percent of up to $10,000 in qualified wages per employee per quarter, and eligibility rules were loosened. Most employers' eligibility ended after the third quarter of 2021, with recovery startup businesses eligible through the fourth quarter.

Employers qualified either by experiencing a full or partial suspension of operations due to a governmental order, or by demonstrating a significant decline in gross receipts against a comparable 2019 quarter. The interpretation of partial suspension proved contentious, and it became the basis for a large volume of aggressive claims promoted by firms operating on contingency fees - many asserting eligibility on grounds such as supply chain disruption that the IRS has consistently rejected.

The IRS response has been sustained. It imposed a moratorium on processing new claims in September 2023, opened voluntary disclosure and claim withdrawal programs, and has pursued examinations and criminal enforcement against promoters. Legislation in 2025 disallowed certain late-filed third and fourth quarter 2021 claims and extended the assessment period for ERC-related adjustments, giving the Service a longer window to examine claims already paid.

The claim filing window has now closed for all periods. What remains for CPA firms is the aftermath: defending prior claims under examination, evaluating clients who received refunds on questionable grounds, advising on repayment options, and handling the income tax consequence that ERC refunds require amending the relevant year's return to reduce the wage deduction - a step many claimants never took.