Employee Retention Credit (ERC) Status: Where Claims Stand and What Business Owners Need to Know
The Employee Retention Credit (ERC) was a pandemic-era payroll tax credit for businesses that experienced significant revenue declines or government-ordered shutdowns during 2020 and 2021. The credit was worth up to $5,000 per employee for 2020 and up to $7,000 per employee per quarter for Q1-Q3 2021. Starting in late 2023, the IRS paused processing of new ERC claims due to widespread fraud and aggressive marketing by “ERC mills” that promoted the credit to businesses that did not qualify.
Current status (as of 2025-2026):
- The IRS has a moratorium on processing new ERC claims filed after September 14, 2023
- Claims filed before that date are being processed slowly, with significant additional scrutiny
- The IRS has identified a high percentage of claims as potentially fraudulent or incorrect
- Business owners who received ERC payments based on invalid claims face repayment plus penalties and interest
- The IRS Voluntary Disclosure Program (VDP) allows businesses to repay 85% of the credit received (keeping 15%) with no penalties or interest, for claims that were incorrect but not fraudulent
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)
- 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
What should owners do if they received ERC payments?
If the business legitimately qualified (verified revenue decline or government shutdown order), keep documentation supporting the claim: quarterly revenue comparisons, government orders, payroll records showing the wages claimed, and the ERC calculation. For current guidance, see IRS Publication 15 (Employer Tax Guide).
If the business claimed the ERC based on aggressive marketing (an “ERC mill” said they qualified without rigorous analysis), review the claim with an independent CPA. Common red flags that the claim may be invalid:
- The business did not experience a 50% (2020) or 20% (2021) revenue decline
- The claim was based on “supply chain disruption” without a specific government order
- The ERC promoter charged a percentage of the credit (contingency fee)
- The promoter filed the claim without reviewing the business’s actual financial records
- The business continued normal operations throughout the pandemic
If the claim is questionable, the Voluntary Disclosure Program offers the best resolution: repay 85% of the credit, keep 15%, no penalties, no interest. This is far better than an IRS audit that demands 100% repayment plus penalties (20-75%) and interest.
What about businesses still waiting for a legit ERC refund?
Businesses with valid claims filed before the moratorium are waiting 12-24+ months for processing. The IRS hasn’t 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 tax records should I keep and for how long?
The IRS generally requires you to keep tax records for 3 years from the date you filed the return or 2 years from the date you paid the tax, whichever is later. Keep records for 6 years if you underreported income by more than 25%, and indefinitely if you did not file a return or filed a fraudulent return. Employment tax records must be kept for at least 4 years. Property records (purchase price, improvements, depreciation) should be kept for as long as you own the asset plus the applicable retention period after disposition. Digital copies are acceptable as long as they are legible and can be reproduced if requested by the IRS.
What is the qualified business income deduction under Section 199A?
The Section 199A deduction allows eligible self-employed taxpayers and pass-through business owners to deduct up to 20% of their qualified business income from their taxable income. For taxable income below the threshold ($191,950 single, $383,900 married filing jointly in 2024), the deduction is simply 20% of QBI with no additional limitations. Above the threshold, specified service trades or businesses (SSTBs), including accounting, law, health, consulting, and financial services, face a phase-out that completely eliminates the deduction at $241,950/$483,900. Non-SSTB businesses above the threshold are limited by the greater of 50% of W-2 wages paid OR 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property. This deduction is scheduled to expire after December 31, 2025, unless Congress extends it.
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Yarik Yarosh, CPA. "Employee Retention Credit (ERC) Status: Where Claims Stand and What Business Owners Need to Know." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-erc-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.