Employee Retention Credit: Eligibility, Refunds, and What a Small Employer Can Still Do

The pitch reached me by phone, by fax, and once in an envelope printed to look like a government notice. Three different firms in one week, all quoting the same headline number of $26,000 per employee, all wanting a percentage of whatever came back. I did not sign with any of them.

That was not caution born of insight. It was that none of them would tell me which government order had suspended my operations. They wanted the payroll file and a signature, and they would work out the theory later.

The credit itself was real, and plenty of small employers were genuinely owed money by it. The problem was the industry that assembled around it, and the cleanup is still running years after the filing windows closed.

This is not a guide to claiming the credit, because that is no longer possible. It answers the two questions employers still ask: would my business have qualified, and what happens to a claim that is already sitting at the IRS. I build FirstHR, an onboarding and HR platform rather than a payroll provider. General information, not tax or legal advice.

Where the Credit Stands

The Employee Retention Credit is closed. Both filing windows have expired, so no employer can start a new claim, and the only live activity is the IRS working through what was already filed and disputing a large share of it.

The IRS publishes a running count of what is left, updated monthly. On its Employee Retention Credit page, the agency put the remaining inventory at approximately 14,900 claims for the week ending August 29, 2026, broken out by stage. Reading that breakdown is the fastest way to understand the current phase of the program.

What the Credit Actually Was

The Employee Retention Credit was a refundable payroll tax credit for employers that kept paying wages while the pandemic disrupted their operations. Refundable matters here: it could exceed the employment tax you owed, so it came back as cash rather than only reducing a bill.

Because almost nobody claimed it in real time, the ERC became a retroactive amendment exercise. That single fact explains the whole shape of the program: a wave of amended returns arriving years after the quarters they covered, filed largely by firms that had not prepared the original quarterly employment tax returns.

The Three Ways an Employer Qualified

An employer qualified through one of three routes, and only one had to apply in a given quarter. Two of them covered 2020 and the first three quarters of 2021. The third was a narrow lane for businesses that had only just opened.

Size changed what counted as a qualified wage. Employers averaging more than 100 full-time employees in 2019 could only count wages paid to employees for time they were not working, and for the 2021 quarters that threshold rose to more than 500. Below those lines, all wages paid in an eligible quarter counted.

The suspension route is where most of the disputed claims live. A promoter could describe almost any disruption as a partial suspension, and the marketing leaned hard on supply chain theories. The IRS position is narrower: a government order had to suspend operations, the effect had to be more than nominal, and a supplier theory works only if an order suspended the supplier.

What the Credit Was Worth

The maximum was $26,000 per employee across the whole program, and very few employers reached it. That figure assumes a business qualified in 2020 and in each of the first three quarters of 2021, at the full wage cap every time. It became the headline number in the marketing that followed. The rates below come from the IRS 2020 versus 2021 comparison chart.

Qualified wages included certain health plan expenses allocable to those wages, counting both the portion the employer paid and the portion employees paid through pre-tax salary reduction. They excluded wages already used to support Paycheck Protection Program (PPP) loan forgiveness, which is the overlap that surfaces repeatedly in examinations of claims prepared by fee-based firms.

The Deadlines That Closed It

Two dates closed the program: April 15, 2024 for the 2020 tax periods and April 15, 2025 for the 2021 tax periods. Both are stated plainly in the IRS frequently asked questions on the credit, and neither has any late-filing mechanism attached to it.

Those deadlines come from the standard time limit on employment tax refund claims, not from any pandemic-specific rule. The same IRS answers on the Employee Retention Credit confirm the gross receipts percentages and the full-time employee thresholds quoted above. Check them there before you accept a figure from any other source.

The Moratorium and the Backlog

The IRS stopped processing new ERC claims on September 14, 2023, in the middle of the filing period. Claims received after September 13 of that year went to the back of a queue that did not move, while claims already in hand got extra scrutiny and a longer processing target.

Processing resumed in stages. The agency eventually worked forward through claims filed up to January 31, 2024, the same date the law later used as its cutoff for the last two quarters of 2021. What was left after that has not behaved like a queue at all.

The remaining 4,600 are split between claims still under review and claims pending payment or disallowance. Put differently, about 70 percent of the open inventory is in examination or dispute, which is why no useful average processing time exists for a claim that is still outstanding.

The Late-Filed Claim Rule

One category of claim can no longer be paid at all, regardless of merit. For the third and fourth quarters of 2021, a claim filed after January 31, 2024 cannot produce a credit or refund, because the One Big Beautiful Bill Act cut those claims off when it was signed on July 4, 2025.

This surprises employers who were told the deadline was April 15, 2025 and filed in good faith before it. The general refund deadline and this specific cutoff are two different rules, and for those two quarters the earlier one now governs.

The IRS published frequently asked questions on the compliance provisions covering when a claim counts as timely filed and what appeal rights survive a disallowance on that basis.

Beyond the cutoff, the One Big Beautiful Bill Act lengthened the assessment period on those two quarters to six years and created a $1,000 per instance penalty for ERC promoters who failed the new due diligence requirement. It also extended the time to amend an income tax return to claim a wage deduction for a disallowed credit, a deduction the credit had reduced.

What to Do Now

Your next step depends entirely on where your claim stands, and the five situations below call for genuinely different actions. Most employers only need to find their own row and can skip the rest.

If your claim is simply pending, the discipline is unglamorous. Keep the substantiation package (the documents that prove the claim) assembled and current, keep the mailing address on file with the IRS accurate, and answer any notice inside the window it gives you. A claim lost on a missed response deadline is the most avoidable outcome in this whole process.

If Your Claim Was Disallowed

A disallowance letter is not the end of the matter, but it starts a clock that most employers do not notice. Under Internal Revenue Code section 6532(a), you have two years from the date on the notice to resolve the claim administratively or to file a refund suit in federal court.

The Taxpayer Advocate Service pressed the IRS on exactly this risk, because administrative review (the IRS working through responses and appeals) was consuming the two-year window and leaving taxpayers with no time to sue. Its blog post on protecting an ERC claim explains the resulting Notice CP320B, which steers eligible taxpayers to the streamlined Form 907 route.

The IRS announced the notice on April 27, 2026 and began sending it shortly afterward to taxpayers with six months or less remaining on their two-year period.

The log below exists for one reason: to get the letter date, the date two years out, and the name of the person responsible onto a single page that is not an email.

If You Want the Claim Back

The withdrawal process is still open, and it is the cleanest exit available. It applies when the claim has not been paid, or when a refund check arrived and has not been cashed or deposited, and the IRS treats a withdrawn claim as though it was never filed.

That means no interest, no penalties, and no examination of a position you no longer want to defend. For an employer who now suspects the theory behind the claim was thin, that is a materially better outcome than waiting to see whether the audit lands.

The IRS withdrawal process does come with two conditions employers miss. The adjusted return (the amended employment tax return that made the claim) must have been filed only to claim the ERC, with no other adjustments on it, and you have to withdraw the entire credit rather than part of it.

If the refund was paid and spent, the picture changes. The second ERC Voluntary Disclosure Program closed on November 22, 2024 and its application form is obsolete, so what remains is amending and repaying. Bring a tax professional into that decision before the IRS opens an examination, because the sequence affects the penalty exposure.

The Audit Window

The assessment period on ERC claims for the last two quarters of 2021 now runs six years under section 3134(l). That is how long the IRS has to audit those claims and assess tax, and the clock starts on the latest of three dates: the original return filing, the date that return is treated as filed, and the date the claim was made.

A claim filed in early 2024 for one of those quarters can therefore be assessed into 2030. That length changes what you keep and for how long. A refund that arrived and cleared is not a closed file, and the employer who cannot reproduce the calculation is the employer who loses the argument by default rather than on the merits.

None of this is exotic. It is the same discipline described in our guide to payroll recordkeeping, applied to a file with a longer clock than usual.

What turns that list into a defensible file is an index that says where each piece actually sits. Fill one claim record for each quarter you claimed, and store the index with the documents rather than in an email thread.

What the Credit Is Not

Two adjacent things get confused with the ERC often enough to be worth separating. Both are real, both still exist in some form, and neither is what this article covers.

The first is a payment you make rather than a credit you claim. A retention bonus is money paid out of your own pocket to keep an employee through a named date. The names collide, but the mechanics have nothing in common.

The second is the other federal employment credit small employers ask about, the one tied to hiring from designated groups rather than to pandemic disruption. It has its own certification paperwork and its own tight post-hire deadline, and we cover it separately in the guide to the Work Opportunity Tax Credit.

The credit also came with an income tax consequence people forget. Claiming the ERC required reducing the wage deduction for the same tax period, which usually meant amending the income tax return as well. Employers who took the refund and never touched the income tax filing have an open item, and it is a common finding when a claim gets examined.

Other Employee Tax Credits an Employer Might Mean

Employee tax credit is a loose phrase that covers at least three unrelated things. The ERC is one, the hiring credit above is another, and the third is the tip credit, which is what employers with tipped staff are usually asking about.

The tip credit is claimed on Form 8846 for the employer share of Social Security and Medicare tax paid on employee tips. It is a general business credit that lands on the income tax return rather than a refund of payroll tax, which is the reverse of how the ERC worked.

The tip credit also recurs every year instead of belonging to a window that has closed. The FICA tip credit guide works through the arithmetic and the wage baseline that decides it.

Common Mistakes

Every mistake below looked reasonable when it was made. The table shows why each one happened and what it means for a claim today.

The pattern behind all eight is the same. The claim was prepared by someone whose fee depended on the answer being yes, and the employer kept none of the reasoning.

Documentation habits are the whole defense here, which is the same argument behind ordinary payroll compliance work. If a claim of yours is still open, rebuild that reasoning now and keep it with your own documents, not with the firm that filed it.

Frequently Asked Questions