What Is the ERC Tax Credit and How Do You Claim It?

The ERC tax credit, or Employee Retention Credit, is a refundable payroll tax credit that Congress created to help businesses keep workers employed during the COVID-19 pandemic. Eligible employers can claim up to $5,000 per employee for 2020 and up to $21,000 per employee for 2021, for a combined maximum of $26,000 per employee.

In this article, we cover who qualifies, how much the credit is worth by year, which wages count, and exactly how to file a retroactive ERC claim before the statute of limitations runs out.

What Does ERC Stand For?

ERC stands for Employee Retention Credit, a refundable tax credit applied against the employer’s share of payroll taxes. Unlike a deduction that reduces taxable income, a credit reduces your tax liability dollar-for-dollar, and if the credit exceeds what you owe, the IRS refunds the difference.

Originally enacted under the CARES Act in March 2020, the ERC was expanded twice—by the Consolidated Appropriations Act in December 2020 and the American Rescue Plan Act in March 2021. It belongs to a broader group of business tax credits designed to lower employer costs during economic hardship.

For many small and midsize businesses that kept staff on during 2020 and 2021, it proved to be the most valuable COVID-era relief program available, often more lucrative than the PPP on a per-employee basis.

Who Qualifies for the ERC Tax Credit?

To qualify for the ERC, you need to be an eligible entity. These include for-profit businesses, tax-exempt organizations, and certain government entities. On the other hand, sole proprietors and self-employed individuals cannot claim the ERC on wages paid to themselves, but they may qualify on wages paid to actual employees.

Next, your business must meet at least one of two eligibility conditions in each quarter it claims, i.e., (1) significant decline in gross receipts or (2) full or partial suspension of operations due to a government COVID-19 order.

That said, let’s examine the two eligibility conditions more closely.

#1. Businesses That Experienced a Decline in Gross Receipts

A significant decline in gross receipts means quarterly revenue fell by at least 50% compared to the same quarter in 2019 for 2020 claims, or by at least 20% for 2021 claims. Once a quarter meets the threshold, the following quarter is automatically included as a “recovery quarter” even if revenue rebounds.

For example, if your Q2 2019 gross receipts were $200,000 and Q2 2020 brought in $90,000, that 55% drop qualifies the business for Q2 2020. The following quarter (Q3 2020) is then automatically eligible under the recovery quarter rule, even if revenue returned to normal levels.

#2. Businesses Subject to Government-Ordered Suspensions

A full or partial suspension of business operations due to a federal, state, or local government COVID-19 order qualifies an employer for the ERC—even without a revenue decline. A partial suspension applies when only a portion of the business was affected, such as a restaurant ordered to close its dining room while keeping takeout open.

This condition requires careful documentation. The IRS has scrutinized many partial-suspension claims, particularly where businesses continued most operations remotely. Employers should retain the specific government orders that limited their operations and document the operational impact with contemporaneous records.

How Much Is the ERC Tax Credit Worth?

The credit amount differs between 2020 and 2021 because Congress raised both the credit rate and the per-employee wage cap when it expanded the program. The 2021 version is roughly three times more generous per quarter than the 2020 version.

Here’s a quick breakdown per period:

A business that qualifies across all available periods could recover up to $26,000 per employee in total ($5,000 for 2020 plus $21,000 across the three eligible quarters of 2021). For a company with 20 employees, that’s a potential $520,000 in refundable credits.

What Wages Count as Qualified Wages?

Qualified wages for the ERC include wages paid to employees plus the employer’s cost of maintaining health insurance coverage for those employees. What specifically qualifies depends on the employer’s average full-time employee count in 2019.

For employers that averaged 500 or fewer full-time employees in 2019, all wages paid during an eligible quarter count—even if employees continued working normally. For employers that averaged more than 500 full-time employees, only wages paid to employees who were not providing services (those on furlough or with reduced hours) qualify.

Health insurance costs included in employee compensation packages, specifically employer-paid fringe benefits related to health coverage, may be included even for hours employees were not working. This can meaningfully increase the effective credit amount for businesses with comprehensive benefits.

Nevertheless, keep one critical rule in mind. The wages used to claim forgiveness on a Paycheck Protection Program (PPP) loan cannot also be used for the ERC. However, businesses that received PPP loans can still claim the ERC on qualifying wages not covered by PPP forgiveness. Many businesses missed this opportunity, incorrectly assuming the two programs were mutually exclusive.

Can You Still Claim the ERC Tax Credit?

Yes, you can still file retroactive ERC claims for qualifying 2020 and 2021 wages. The IRS allows employers to amend their payroll tax returns for up to five years after the original filing date of the affected Form 941. For most 2020 quarters, the window runs through 2025; for 2021 quarters, through 2026.

The retroactive process requires filing Form 941-X (Amended Employer’s Quarterly Federal Tax Return) for each individual quarter you want to claim. You cannot consolidate multiple quarters onto a single amended return—a separate 941-X must be filed per quarter.

However, proceed carefully. The IRS has flagged widespread ERC fraud stemming from a wave of “ERC mills.” These are third-party promoters that filed aggressive and often unqualified claims for large contingency fees. The IRS issued a moratorium on ERC processing in September 2023, significantly slowed claim reviews, and launched compliance campaigns targeting questionable filings.

Before filing retroactively, review IRS red flags for small businesses and ensure your claim is supported by solid audit documentation, such as payroll records, government orders, and quarterly gross receipts data. Work with a qualified CPA or tax attorney, not a promoter whose compensation depends on the size of your refund.

How to Apply for the ERC Tax Credit

To apply for the ERC tax credit retroactively, you need to go through the IRS payroll tax system. Follow these steps to file correctly:

• Identify eligible quarters. Determine each quarter between Q1 2020 and Q3 2021 where you meet either the gross receipts decline test or the government suspension test.

• Compile payroll records. Pull records of wages and employer-paid health insurance costs for each eligible quarter. If your business received a PPP loan, subtract the wages used for forgiveness from your ERC calculation.

• Calculate the credit. Apply 50% to qualified wages up to $10,000 per employee for 2020, and 70% to qualified wages up to $10,000 per quarter per employee for 2021.

• File Form 941-X. Submit an amended return for each eligible quarter. Report the refundable credit amount on Line 18a.

• Amend your income tax return. The IRS requires you to reduce your wage deduction by the amount of ERC claimed. You may need to amend your business tax return for 2020 or 2021 accordingly.

Processing times for retroactive claims have ranged from several months to over a year due to high volume and IRS compliance reviews. Build your payroll processing documentation now to support the claim if the IRS requests verification. Also, maintaining strong HR payroll compliance records will also protect you if your claim is audited.

6 Common ERC Mistakes That Can Cost You

Errors in ERC claims can result in penalties, repayment demands, or a formal tax audit. These are the most frequent problems the IRS has identified:

• Claiming wages used for PPP forgiveness. Using the same wages for both programs is prohibited and is the most common reason for IRS claim adjustments.

• Including wages paid to majority owners. Wages paid to owners with more than a 50% stake in the business, and their family members, generally do not qualify as ERC wages.

• Failing to document the partial suspension. If claiming under the suspension test, you need contemporaneous evidence—copies of government orders, internal memos, and records showing operational impact.

• Skipping the income tax adjustment. Not reducing your wage deduction on your income tax return by the ERC amount is a compliance error that can prompt IRS action.

• Missing the employee count threshold. Applying large-employer wage rules to a small employer (or vice versa) leads to either underclaiming or overclaiming the credit.

• Working with unvetted ERC promoters. If a firm guarantees a large refund without a detailed analysis of your specific eligibility, that is a warning sign—not a selling point.

Final Thoughts

The ERC tax credit remains one of the most substantial pandemic-era relief programs for U.S. employers. Businesses that paid qualifying wages between March 2020 and September 2021 may still be eligible to recover thousands of dollars per employee through a retroactive amended payroll return—but the window to do so is narrowing.

If you haven’t evaluated your eligibility yet, start by pulling your quarterly gross receipts and payroll records, then work with a qualified CPA to assess each period. Make sure to keep your payroll documentation (such as pay stubs, tax forms, etc.) organized to support the claim if the IRS requests verification.

ERC Tax Credit FAQs

#1. What is the ERC tax credit in simple terms?

The ERC tax credit is a refundable payroll tax credit that lets eligible employers recover a percentage of wages paid to employees during the COVID-19 pandemic. Qualifying businesses can claim up to $5,000 per employee for 2020 and up to $21,000 per employee across three quarters in 2021, depending on which periods they meet the eligibility tests.

#2. Is the ERC tax credit still available?

The ERC program is closed for new wages since no new qualifying wages can be earned after September 30, 2021 for most employers. However, businesses can still file retroactive claims for 2020 and 2021 wages by submitting amended Form 941-X returns before the applicable statute of limitations expires, which runs approximately five years from the original filing date.

#3. Does the ERC count as taxable income?

The ERC refund itself is not included in taxable income, but it does require you to reduce your deductible wage expenses on your federal income tax return by the credit amount. This effectively increases taxable income indirectly. Businesses that have already filed their 2020 or 2021 income tax returns without making this adjustment need to file an amended business tax return to correct it.

#4. How long does it take to receive an ERC refund?

The time it takes to receive an ERC refund varies significantly due to high claim volumes and IRS compliance reviews. As of mid-2025, the IRS is working through a backlog of claims filed before and during the September 2023 moratorium. Some businesses have waited more than a year for refunds.

#5. Can nonprofit organizations claim the ERC?

Yes, tax-exempt organizations—including nonprofits, churches, and 501(c)(3) entities—qualify for the ERC if they meet the gross receipts decline or government suspension tests. The same credit rates, wage caps, and employee-count rules apply. Nonprofits file the same Form 941-X to claim the credit retroactively.