The Employee Retention Credit is a refundable tax credit for businesses that kept workers on payroll during COVID-19 shutdowns

The Employee Retention Credit (ERC) is a federal tax refund available to businesses that continued paying employees during periods when government orders restricted operations or revenue dropped sharply between 2020 and 2021. Unlike a tax deduction, which reduces the income you report, the ERC is a refundable credit — meaning if the credit exceeds the taxes you owe, the IRS sends you the difference as a refund check or direct deposit.

The credit covers a portion of wages you paid during lockdowns or revenue declines. may be able to access businesses can claim up to $5,000 per employee for 2020 and up to $5,000 per employee for each quarter of 2021, for a maximum of $26,000 per employee across both years combined. The refund comes from the IRS, not your state, and the process involves amending past tax returns or filing a specific form with your current return.

Thousands of small and mid-sized businesses have claimed the ERC since the IRS began processing them in 2021, but many business owners still do not know they may be may have access to to it. The credit was designed to reward companies that made the difficult choice to retain staff instead of laying them off during the pandemic.

Key Takeaways

  • The ERC refund covers wages paid to employees during 2020 and 2021 when government orders shut down operations or revenue fell by 20 percent or more.
  • You claim the credit by filing an amended return (Form 941-X) for past quarters or by including it on your current year return if you have not yet filed.
  • The maximum refund is $26,000 per employee ($5,000 for 2020 and up to $5,000 per quarter in 2021), though the amount depends on which wages you count.
  • Processing times vary widely — some refunds arrive within months, while others take a year or longer because the IRS is still working through a large backlog of claims.
  • You cannot claim the ERC on the same wages you used to claim the Paycheck Protection Program (PPP) loan forgiveness.

Who can claim the Employee Retention Credit

To claim the ERC, your business must have been in operation during 2020 or 2021 and meet one of two conditions. The first is a government order: your state, local, or tribal government issued an order that suspended your business operations or severely restricted the services or goods you could provide. The second is a revenue test: your gross receipts for a quarter in 2020 or 2021 were at least 20 percent lower than the same quarter in 2019 (or 50 percent lower if you are in the hospitality or food service industry).

Sole proprietors, partnerships, S-corporations, C-corporations, nonprofits, and tax-exempt organizations can all claim the ERC. You do not need to have received a Paycheck Protection Program (PPP) loan to claim it, though if you did receive PPP forgiveness, you cannot use the same wages for both programs. Many businesses used PPP wages for loan forgiveness and are now claiming the ERC on different wage periods or different employees.

Seasonal businesses, startups that began in 2020, and businesses that temporarily closed can claim the credit. Government contractors and businesses that received other federal relief funds are also generally may be able to access, as long as they meet the operational or revenue test.

How to file for an ERC refund

If you have already filed your 2020 or 2021 tax return without claiming the ERC, you will file an amended return using Form 941-X (Adjusted Employer's Quarterly Federal Tax Return of Withheld Income Taxes). You file one Form 941-X for each quarter you are claiming. For example, if you are claiming the credit for all four quarters of 2020, you will file four separate 941-X forms, one for each quarter.

On the Form 941-X, you report the wages that may have access to for the credit and calculate the refund amount. You will need your payroll records showing gross wages paid to employees during each quarter, as well as documentation of the government order or proof of the revenue decline (such as quarterly revenue statements or tax returns from 2019 for comparison).

If you have not yet filed your 2021 return, you can claim the ERC directly on your original return instead of filing an amended one. Some businesses also claim the credit on their 2022 return if they did not realize they were may be able to access until later. The IRS allows you to claim back to the beginning of the pandemic relief period.

Processing times and refund delivery

The IRS began processing ERC claims in 2021, but the volume of claims has created a significant backlog. Some refunds have been issued within three to six months of filing, while others have taken a year or longer. The IRS does not publish a standard processing timeline for ERC claims because the wait time depends on the complexity of your return, whether the IRS requests additional documentation, and where your claim sits in the queue.

When your refund is approved, the IRS will send it by direct deposit to the bank account listed on your tax return, or by check if you did not authorize direct deposit. You can track the status of your amended return using the IRS Where's My Amended Return tool on the IRS website, though this tool does not always show real-time updates for ERC claims specifically.

If you filed multiple Form 941-X returns for different quarters, each one is processed separately, so you may receive refunds in multiple payments rather than one lump sum. Some businesses have received partial refunds while waiting for others to be processed.

Documentation you will need to gather

Before filing, collect your payroll records for each quarter you are claiming. You will need the total gross wages paid to employees (not including owner wages if you are a sole proprietor or partner). If you are claiming based on a government order, save a copy of the order itself or a link to where it was published — state health department websites, city council records, and governor's office websites all archive these orders.

If you are claiming based on a revenue decline, gather your quarterly gross receipts for 2019 and the quarters you are claiming in 2020 or 2021. This can come from your tax returns, accounting software, or bank statements. The IRS may ask you to prove the connection between the government order or revenue decline and your decision to retain employees, so keep records showing that you did not lay off staff during the period you are claiming.

You will also need your Employer Identification Number (EIN) and your business tax return for the year you are filing. If you received PPP loan forgiveness, have that documentation available to show which wages you used for PPP so you do not double-claim on the same wages.

Common mistakes that delay or deny ERC refunds

The most common error is claiming the ERC on wages that were also used for PPP loan forgiveness. The IRS will deny or reduce your refund if you claim the same wages twice. You must choose which program to use each wage dollar for, and many businesses have had to amend their ERC claims after the IRS caught this overlap.

Another frequent mistake is miscalculating which quarters may have access to. Some businesses claim quarters that did not meet the revenue test or were not subject to a government order. The IRS is strict about the 20 percent revenue decline threshold — a 19 percent decline does not may have access to. Seasonal businesses sometimes incorrectly compare quarters from different seasons rather than the same quarter in different years.

Incomplete documentation is also a reason the IRS requests more information or denies claims. If you cannot produce the government order or your revenue records do not clearly show the decline, the IRS may ask you to provide it before processing your refund. Delays from missing documentation can add months to your wait time.

What to do if your ERC refund is delayed or denied

If you filed your Form 941-X more than a year ago and have not received a refund, you can contact the IRS at 800-829-1040 to ask about the status. Have your EIN, the quarters you claimed, and the date you filed ready. The IRS can tell you whether your claim is still being processed, whether additional information was requested, or whether it was denied.

If the IRS denied your claim, you will receive a letter explaining the reason. Common reasons include wages that were also used for PPP forgiveness, quarters that did not meet the may be able to access test, or missing documentation. You can file an amended Form 941-X to correct the error, or you can dispute the denial by following the instructions in the IRS letter.

If you believe you made an error on your original claim, you can file a new Form 941-X for the same quarters. The IRS will process the most recent version you file. Some businesses have filed multiple amended returns to correct mistakes or to add quarters they initially missed.

Frequently Asked Questions

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

Yes, but you cannot use the same wages for both programs. If you used certain wages for PPP loan forgiveness, you must claim the ERC on different wages or different employees. Many businesses split their payroll between the two programs to maximize their total refund.

What if my business was not shut down by a government order but my revenue still dropped?

You can still claim the ERC if your gross receipts for a quarter were at least 20 percent lower than the same quarter in 2019. The revenue decline alone is enough to may have access to — you do not need a government order. Hospitality and food service businesses only need a 50 percent decline.

How long does it take to get an ERC refund after I file?

Processing times vary widely, from three months to over a year. The IRS is working through a large backlog of ERC claims. You can check the status of your amended return using the IRS Where's My Amended Return tool, though updates may be delayed.

Can I claim the ERC if I am self-employed or a sole proprietor?

Sole proprietors and self-employed individuals cannot claim the ERC on their own wages, but they can claim it on wages paid to employees. If you have no employees, you are not may be able to access for the credit.

What if I already filed my 2020 and 2021 tax returns without claiming the ERC?

You can still claim it by filing an amended return (Form 941-X) for each quarter you are claiming. There is no time limit on amending to claim the ERC, so you can file years after your original return was submitted.