Employee Retention Credit (ERC) Status for Small Businesses in 2025

By Yarik Yarosh, CPA ·September 5, 2026 ·7 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

The Employee Retention Credit (ERC) was a refundable payroll tax credit available to employers who were affected by COVID-19 government orders or experienced significant revenue declines in 2020 and 2021. At its peak, the credit was worth up to $7,000 per employee per quarter ($28,000 per employee for 2021). The program generated significant fraud and improper claims, and the IRS has since taken aggressive action to shut down the pipeline.

✓Key takeaway

Current ERC status (as of 2025):

New claims are closed. The IRS imposed a moratorium on processing new ERC claims on September 14, 2023, and Congress effectively ended the program for new claims filed after January 31, 2024.

Who was actually eligible:

Businesses with a significant decline in gross receipts (50%+ decline in a quarter compared to the same quarter in 2019 for 2020; 20%+ decline for 2021)
Businesses subject to a full or partial government-ordered suspension of operations (not just general pandemic effects or supply chain disruption)
The credit applies to qualified wages paid to employees, NOT to the owner’s wages in most cases
PPP recipients can claim ERC but NOT on the same wages used for PPP forgiveness

Existing claims in the queue:

The IRS has a large backlog of unprocessed ERC claims
Legitimate claims are being processed, but slowly (processing times of 12-18 months are common)
The IRS is reviewing claims in batches, prioritizing the oldest claims
Some claims are being paid; others are being denied after review

IRS enforcement actions:

The IRS has identified thousands of improper claims
Criminal investigations have been opened against ERC mills (companies that filed fraudulent claims on behalf of businesses)
The IRS Voluntary Disclosure Program allowed businesses to repay 85% of improper ERC refunds (with no penalties) through March 22, 2024; a second window may open
The IRS ERC Claim Withdrawal Process allows businesses to withdraw unprocessed claims without penalty

If you filed a legitimate ERC claim:

Check the status by calling the IRS ERC hotline or checking your IRS account transcript
Be prepared for an IRS examination (the IRS is auditing a significant percentage of claims)
Maintain your documentation: proof of government orders, revenue decline calculations, qualified wages documentation, and the professional’s analysis that supported the claim
Do NOT amend your income tax return to reduce wage deductions until the ERC is actually received (the ERC reduces the wage deduction in the year the credit was claimed, not when it is received)

If you received ERC refunds and are unsure they were legitimate:

Consult an independent CPA (not the firm that filed the claim) to review the eligibility analysis
If the claim was improper: consider the Voluntary Disclosure Program if it reopens, or proactively contact the IRS before they contact you
Penalties for improper claims: the IRS can assess the full refund amount plus penalties (20% accuracy penalty or 75% fraud penalty) plus interest

Red flags that your ERC claim may have been improper:

The ERC firm charged a percentage of the refund (contingency fees are a red flag)
The firm did not ask for detailed revenue records, payroll records, or information about government orders
The firm claimed eligibility based on “supply chain disruption” without documenting specific government orders
The firm filed claims for periods where the business had NO revenue decline and was not subject to a full or partial suspension order
The firm claimed the maximum credit for every quarter without analyzing actual eligible wages

What should a business do about a questionable ERC refund?

Hypothetical example

Round numbers. For current guidance, see IRS Publication 15 (Employer Tax Guide). A restaurant S-Corp received $120,000 in ERC refunds (2020 Q2-Q4 and 2021 Q1-Q3). The claim was filed by an ERC mill that charged 25% of the refund ($30,000 in fees). The restaurant owner is now unsure the claim was legitimate.

Step 1: Independent review. A CPA (not the firm that filed the claim) reviews the eligibility:

2020 Q2: the restaurant was subject to a full government shutdown order. ELIGIBLE.
2020 Q3: the restaurant was operating at 50% capacity under a government order. ELIGIBLE.
2020 Q4: no government orders were in effect, and revenue had recovered to 90% of 2019 levels. NOT ELIGIBLE (the revenue decline test requires a 50% decline in 2020 or a 20% decline in 2021).
2021 Q1: revenue was $200,000 vs. $300,000 in Q1 2019 (33% decline, exceeds the 20% threshold). ELIGIBLE.
2021 Q2: revenue was $280,000 vs. $310,000 in Q2 2019 (10% decline, does NOT meet the 20% threshold). NOT ELIGIBLE.
2021 Q3: revenue fully recovered. NOT ELIGIBLE.

Result: 3 of 6 quarters were eligible. Approximately $60,000 of the $120,000 was properly claimed. $60,000 was improperly claimed.

Step 2: Options. Option A: Voluntary Disclosure Program (if reopened).

Return 85% of the improper amount: $60,000 x 85% = $51,000
No penalties, no interest, no criminal referral
Total cost: $51,000

Option B: Amended returns to repay the improper amount.

Repay $60,000 plus interest (approximately $8,000 at current rates)
No penalties if the repayment is voluntary and pre-audit
Total cost: $68,000

Option C: Do nothing and wait for IRS audit.

If the IRS audits and finds the $60,000 improper:
- Repayment: $60,000
- 20% accuracy penalty: $12,000
- Interest: $8,000+
- Total: $80,000+
- If fraud is found: 75% penalty ($45,000) plus potential criminal referral

Recommendation: Option A (Voluntary Disclosure) is the lowest-cost resolution. Option C is the most expensive and carries criminal risk.

The ERC mill’s liability: The ERC firm that charged $30,000 in fees may face its own enforcement action, but the BUSINESS is responsible for the accuracy of its tax filings, not the preparer. The business cannot shift liability to the ERC mill. The business may have a civil claim against the firm for professional negligence, but recovering the $30,000 in fees is not guaranteed.

Illustrative numbers only, not a real client and not advice for your facts.

What about businesses still waiting on an ERC refund?

Businesses with valid claims filed before the moratorium are waiting 12-24+ months for processing. The IRS has not given a timeline for clearing the backlog. Businesses can check the status of their claim by calling the IRS ERC hotline or using the “Where’s My Refund” tool (for amended 941-X claims, the tool may not show status). The interest on delayed refunds accrues from the original due date of the 941 (the quarter the wages were paid), so a legitimate delayed refund will include interest when it eventually arrives.

What are the most common IRS audit triggers for small businesses?

Schedule C filers with high gross receipts and significant deductions relative to income are audited at higher rates. Specific triggers include: claiming 100% business use of a vehicle, large home office deductions relative to income, cash-intensive businesses with round-number reporting, significant charitable deductions relative to income, and repeated business losses (hobby loss rule after 3-5 years). Inconsistencies between information returns (1099s, W-2s) and your reported income generate automatic notices. High deduction-to-income ratios compared to industry averages from the IRS’s DIF (Discriminant Information Function) scoring are a primary selection criterion. An audit does not mean you did anything wrong; it means your return was statistically unusual.

Related guides:

How long does the IRS have to audit your tax return?

The standard statute of limitations for an IRS audit is three years from the date you filed your return or the due date, whichever is later, under IRC 6501(a). This extends to six years if you omit more than 25% of gross income from your return, which the IRS interprets broadly to include overstatements of basis in some circumstances after the Supreme Court’s Home Concrete decision. There is no statute of limitations for fraudulent returns or for returns that were never filed, meaning the IRS can audit these at any time. Signing a Form 872 (Consent to Extend the Time to Assess Tax) extends the deadline, and the IRS often requests this near the end of the three-year window to continue an open examination without rushing to closure.

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Cite this page

Yarik Yarosh, CPA. "Employee Retention Credit (ERC) Status for Small Businesses in 2025." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-employee-retention-credit-status

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.