An ERC payment is a tax credit the federal government issued to businesses that kept employees on payroll during pandemic shutdowns, even when revenue dropped.

ERC stands for Employee Retention Credit. Between March 2020 and December 2021, the IRS allowed may be able to access businesses to claim back taxes they had already paid, up to $5,000 per employee for 2020 and $5,000 per employee for 2021. A business with 100 employees could potentially claim $1 million across both years. The money came as a refund on your tax return, not as a new payment from the government.

The credit was designed to reward companies for not laying off workers during lockdowns and revenue collapses. You did not have to explore for it in real time—you claimed it when you filed your tax return for those years, either on your original return or by amending a return you had already filed.

Key Takeaways

  • ERC is a refundable tax credit worth up to $5,000 per employee per year (2020 and 2021 only), claimed on your business tax return, not a separate government program.
  • You had to have kept employees on payroll and experienced either a government-ordered shutdown or a significant drop in gross receipts to be may be able to access.
  • The credit was claimed by amending prior-year tax returns (Form 941-X for payroll tax returns), not by submitting a separate process.
  • The IRS has been processing ERC claims since 2021, and the agency has also been auditing claims it believes were filed incorrectly or fraudulently.
  • If you received an ERC refund and the IRS later disallows it, you will owe the money back plus interest and penalties.

How the ERC worked and who could claim it

To claim the ERC, your business had to meet one of two conditions in 2020 or 2021. Either a government order had to have forced you to fully or partially suspend operations (a lockdown, capacity limit, or similar mandate), or your gross receipts had to have dropped by at least 50 percent compared to the same quarter in 2019. Many businesses may have access to under both conditions in different quarters.

You also had to have paid wages to employees during the period you were claiming the credit. The credit applied to wages you paid between March 13, 2020, and December 31, 2021. Self-employed people and sole proprietors without employees could not claim it. Businesses that received a Paycheck Protection Program (PPP) loan could claim the ERC on wages they did not use the PPP funds to cover—the two programs were not supposed to overlap on the same wages.

The amount was straightforward: $5,000 per employee in 2020 (for the period March 13 through December 31) and $5,000 per employee in 2021. If you had 50 employees, you could claim up to $500,000 total ($250,000 for 2020 and $250,000 for 2021). The credit reduced your federal income tax liability dollar-for-dollar.

How businesses claimed the ERC refund

You did not fill out a separate form and mail it to a government office. Instead, you amended your payroll tax returns using Form 941-X (Adjusted Employer's Quarterly Federal Tax Return for Wages Paid to Employees). If you had already filed your original 941 forms for 2020 and 2021, you filed amended versions showing the ERC claim. If you had not yet filed, you included the credit on your original return.

The form required you to list the number of employees you were claiming the credit for, the wages you paid them, and the quarters in which you may have access to. You had to keep documentation showing that you met one of the two may be able to access conditions—either a copy of the government order that shut you down, or your quarterly gross receipts records showing the 50 percent decline.

Once you filed the amended return with the ERC claim, the IRS processed it. Processing times varied widely. Some businesses received refunds within months; others waited more than a year. The IRS issued the refund as a check or direct deposit, just like any other tax refund.

The fraud problem and IRS audits

Starting in 2021, the IRS began receiving a flood of ERC claims. Many were legitimate. Many were not. Some businesses claimed the credit when they did not may have access to. Others inflated the number of employees or wages. Some claimed the credit on wages that had already been covered by PPP loans, which was illegal. Third-party firms began aggressively marketing ERC claims, sometimes to businesses that had no right to the money.

By 2023 and 2024, the IRS began auditing ERC claims in large numbers. The agency issued Notice 2024-7 in January 2024, warning that it had identified widespread non-compliance and was prioritizing ERC audits. If the IRS disallowed your claim, you had to repay the refund you received, plus interest (currently around 8 percent annually) and penalties that could reach 20 percent or more of the amount owed.

Some businesses that had received ERC refunds received letters from the IRS asking them to prove they may have access to. Others received notices that their claims were being denied outright. If you received an ERC refund and later got an audit notice, you needed to gather the same documentation you should have kept when you filed—government orders, gross receipts records, payroll records, and proof that you did not double-claim wages on a PPP loan.

What happens if you received an ERC refund and now face an audit

If the IRS contacts you about your ERC claim, do not ignore the letter. The agency will give you a important date to respond, usually 30 days. You will need to provide documentation proving that you met the may be able to access conditions and that the wages you claimed were accurate and not already covered by a PPP loan.

If you cannot provide that documentation, or if the IRS determines you did not may have access to, you will owe the refund back. The repayment is treated as a tax debt, and the IRS can pursue collection through wage garnishment, bank levies, or offsets against future refunds. You may also face penalties and interest, which compound over time.

If you believe the IRS made an error in denying your claim, you have the right to appeal through the IRS Appeals process. This is a separate review by an independent IRS office. You would need to submit your documentation and a written explanation of why you believe you may have access to. The appeal process typically takes several months to over a year.

The difference between ERC and other pandemic relief

The ERC was a tax credit, not a grant or loan. You did not have to repay it if you may have access to and claimed it correctly—it was a permanent reduction in your tax liability. This was different from a PPP loan, which had to be repaid (though portions could be forgiven if you met spending requirements). It was also different from Economic Injury Disaster Loans (EIDL), which were actual loans that accrued interest.

The ERC was also different from state and local relief programs. Some states offered their own grants or tax credits during the pandemic. Those were separate from the federal ERC and had their own rules. If you received state relief, it did not automatically disqualify you from the federal ERC, but you had to make sure you did not claim the same wages twice.

What you should do if you think you may have access to but did not claim the ERC

If your business met the may be able to access conditions in 2020 or 2021 but you never filed an ERC claim, you could still file an amended return. The important date to claim the credit was generally three years from the date you filed your original return (or two years from the date you paid the tax, whichever was later). For most businesses, this meant you had until 2024 or 2025 to file an amended 941-X claiming the credit.

However, the IRS has made clear that it is scrutinizing new ERC claims closely, especially those filed after 2023. If you file now, be prepared for a higher likelihood of audit. You will need solid documentation showing you may have access to. If you work with a tax professional or accountant, they can help you gather the right records and file the amended return correctly.

Frequently Asked Questions

Can I claim the ERC if I also received a PPP loan?

Yes, but only on wages you did not use PPP funds to cover. If you used PPP money to pay an employee's salary in a particular quarter, you cannot claim the ERC on that same wage. You have to track which wages were covered by PPP and which were not, and claim the ERC only on the non-PPP wages.

What if I filed an ERC claim and the IRS is now asking me to repay it?

Respond to the IRS letter by the important date with any documentation you have showing you may have access to. If you cannot prove you may have access to, you will owe the refund back plus interest and penalties. You can request an appeal if you believe the IRS made an error, but you should consider consulting a tax professional or attorney first.

Is it too late to claim the ERC now?

The important date depends on when you filed your original return. Generally, you have three years from the filing date to amend and claim the credit. For most 2020 and 2021 returns, this means the important date is sometime in 2024 or 2025. However, filing now carries a higher audit risk because the IRS is actively reviewing ERC claims.

What documents do I need to keep if I claimed the ERC?

Keep your amended 941-X forms, payroll records showing the wages you claimed, government orders or gross receipts records proving you may have access to, and any PPP loan documents showing which wages were covered by PPP. If the IRS audits you, these documents are what you will need to defend your claim.

Can I hire someone to help me file an ERC claim?

Yes, accountants, tax professionals, and law firms can help you file an amended return claiming the ERC. Be cautious of firms that may provide a specific refund amount or promise fast results—no one can may provide the IRS will approve your claim. Make sure whoever you hire understands the current audit environment and can explain the risks.