Master Employee Retention Credit (ERC) with 9 Key Insights

Many business owners are navigating the complex aftermath of the Employee Retention Credit (ERC). While the credit provided significant pandemic-era payroll tax relief, the focus has now shifted from claiming new benefits to understanding compliance requirements, responding to IRS notices, and protecting existing claims.

For many, the opportunity to file new ERC claims has ended. However, companies that previously submitted claims may still be dealing with pending refunds, IRS reviews, eligibility questions, audits, or claim adjustments.

Understanding the current ERC landscape is essential. By maintaining accurate documentation, reviewing eligibility requirements, and responding appropriately to IRS communications, businesses can better manage their existing claims and reduce the risk of costly mistakes.

This guide covers nine key insights every business owner should understand about the Employee Retention Credit in 2026. 

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1. What wasthe Employee Retention Credit (ERC)?

The Employee Retention Credit (ERC) was a refundable payroll tax credit created to encourage businesses to keep employees on payroll during the COVID-19 pandemic.

Established under the CARES Act in 2020, the ERC was later expanded and modified through additional legislation. The program provided financial relief to eligible employers that experienced pandemic-related operational disruptions or significant declines in gross receipts.

The ERC is no longer an active payroll tax credit program for most businesses. Today, many companies are focused on reviewing existing claims, maintaining documentation, and responding to IRS compliance efforts.

For official guidance and updates on the ERC, visit the IRS Employee Retention Credit page.

2. Who was eligible for the Employee Retention Credit?

Eligibility depended on several factors, including the year of the claim, business size, operational impact, and revenue changes.

To qualify during the active ERC periods, employers generally needed to meet one of the following requirements:

Full or Partial Suspension of Operations

Businesses may have qualified if their operations were fully or partially suspended because of government orders related to COVID-19.

Examples included:

• Required business closures
• Capacity restrictions
• Government-imposed limitations that affected normal operations

Significant Decline in Gross Receipts

Businesses could also qualify based on a decline in gross receipts compared with the same quarter in 2019.

Generally:

• 2020: Businesses needed a decline of 50% or more compared with the same quarter in 2019.
• 2021: Businesses generally needed a decline of 20% or more compared with the same quarter in 2019.

Employee Count Rules

The employee threshold depended on the year:

• 2020 claims: Generally fewer than 100 full-time employees.
• 2021 claims: Generally fewer than 500 full-time employees.

Certain nonprofit organizations and recovery startup businesses were also subject to special eligibility rules.

For more details on eligibility, check the IRS ERC Eligibility FAQ.

3. What wages qualified for the ERC?

Qualified wages included eligible compensation and certain employer-paid health plan expenses provided during qualifying periods.

Generally eligible wages included:

• Salaries and hourly wages
• Certain employer-paid health insurance expenses
• Other qualifying compensation under IRS rules

Standard severance payments generally did not qualify unless they met specific IRS requirements.

Businesses were required to carefully calculate qualified wages and avoid using the same wages for multiple federal relief programs. 

4. How much is the Employee Retention Credit worth?

The value of the Employee Retention Credit (ERC) depends on the year and the wages paid to employees. Here’s how the calculation breaks down:

• 2020: For 2020, employers could claim 50% of the first $10,000 in qualified wages per employee for the entire year (not per quarter). The maximum credit per employee for the year was $5,000 (50% of $10,000).
• 2021: For 2021, the credit increased to 70% of the first $10,000 in qualified wages per employee per quarter. This means employers could claim up to $7,000 per employee, per quarter, or a total of $28,000 per employee for the entire year (if eligible for all four quarters).

For more details on how the ERC is calculated, visit the IRS Employee Retention Credit page.

5. Can I still apply for the ERC?

Yes, you can still apply for the ERC, even if you missed the initial deadlines. The ERC is a refundable credit, meaning that if you qualify, the IRS will issue a refund for the amount of credit you're entitled to, even if you've already filed your taxes for the year. You can claim the ERC retroactively for past quarters by filing an amended payroll tax return (Form 941-X).

The IRS allows businesses to claim the credit for the past quarters through Form 941-X.

6. Can I get the ERC if I received a Paycheck Protection Program (PPP) loan?

Yes, initially, businesses that received a Paycheck Protection Program (PPP) loan were not eligible for the ERC. However, this rule changed in December 2020, and businesses that received a PPP loan can now claim the ERC, as long as the wages used for the ERC are not the same wages used for PPP loan forgiveness.

You must carefully allocate the wages between the two programs to ensure compliance. It's a good idea to consult with a tax professional or accountant to make sure you're following the rules properly.

For more details on PPP and ERC eligibility, check the U.S. Treasury Department’s PPP and ERC Guidelines.

7. How do I apply for the Employee Retention Credit?

To apply for the ERC, businesses typically file IRS Form 941, Employer's Quarterly Federal Tax Return, which reports your payroll taxes. You will need to include information about the wages paid to employees and calculate the amount of the credit you're eligible for.

• For 2020, Form 941 can be filed quarterly, and you can claim the credit on your tax return for the quarters in which you were eligible.
• If you’re claiming the ERC retroactively, you will need to file Form 941-X, the Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, to amend your previous returns and receive the refund.

The IRS has a detailed guide for filing Form 941-X.

8. What are the common mistakes to avoid when claiming the ERC?

There are several common mistakes that businesses make when applying for the ERC, which could lead to delays or denial of the credit. These include:

• Overstating the number of eligible employees: Only employees who are actually retained and on the payroll during the applicable period qualify.
• Incorrectly calculating gross receipts: Ensure you have an accurate record of your revenue decline, as this is one of the primary eligibility criteria.
• Using PPP wages for the ERC: As mentioned earlier, businesses cannot use the same wages for both the ERC and PPP loan forgiveness.
• Missing deadlines for retroactive claims: If you’re claiming the ERC for past periods, you must file amended returns promptly to avoid missing the opportunity for a refund.

9. Do I need professional help to claim the ERC?

While it's possible to file for the ERC on your own, it is highly recommended that you consult with a tax professional, especially if you're claiming the credit retroactively or have received a PPP loan. The rules for the ERC can be complex, and an accountant or tax advisor can ensure you maximize your credit while remaining compliant with IRS regulations.

The IRS website also offers additional insights on how to claim the credit and ensure compliance.

Need tax guidance and have a child at home? Explore our ultimate guide to Understanding the Child Tax Credit and maximize your benefits.

Unlocking the real value

The Employee Retention Credit (ERC) is a valuable tool for businesses to offset payroll expenses during challenging economic times, particularly during the COVID-19 pandemic. If your business has been impacted by the pandemic, it’s worth taking the time to explore whether you qualify for this credit. By understanding the rules, keeping accurate records, and filing the appropriate paperwork, you can access financial relief that may be crucial to your business’s recovery and growth.

If you’re unsure about your eligibility or how to apply for the ERC, consulting a tax professional can help ensure you claim the full benefit to which you’re entitled.