Employee Retention Credit: What Employers Need to Know Now

The Current State of the ERC

The Employee Retention Credit (ERC) was created as part of the CARES Act in 2020 to help employers retain employees during the COVID-19 pandemic. It was later expanded and extended through the end of 2021. The credit provided eligible employers up to $5,000 per employee for 2020 and up to $7,000 per employee per quarter for the first three quarters of 2021.

By 2023, the ERC has become one of the most complicated and contentious tax provisions in recent memory. The IRS placed a moratorium on processing new claims in September 2023 due to a flood of questionable claims driven by aggressive third-party promoters. Employers need to understand where things stand.

Eligibility Basics

An employer was eligible for the ERC if, during the relevant period, it either experienced a full or partial suspension of operations due to a government order related to COVID-19, or it experienced a significant decline in gross receipts compared to the same quarter in 2019. The decline threshold was 50% for 2020 and 20% for 2021.

The credit applies to qualified wages paid to employees. For employers with 500 or fewer full-time employees in 2019, qualified wages include wages paid to all employees during the eligible period, regardless of whether they were working. For larger employers, the credit was limited to wages paid to employees who were not providing services.

Warning Signs of Fraudulent Claims

The IRS has identified the ERC as a major area of fraud. Third-party promoters, often called "ERC mills," have aggressively marketed the credit to employers who do not qualify, sometimes taking large contingency fees. Common red flags include:

• A promoter who claims every business qualifies for the credit
• Pressure to file quickly without reviewing your specific circumstances
• Fees based on a percentage of the credit amount
• Claims that a supply chain disruption automatically qualifies you, regardless of actual impact on your operations
• Failure to account for Paycheck Protection Program (PPP) loan forgiveness, which reduces eligible wages

If you filed a claim based on a promoter's advice and are now uncertain about its validity, the IRS has created a voluntary withdrawal program and a disclosure program for employers who want to correct potentially erroneous claims.

If You Have a Pending Claim

The IRS moratorium means that new claims filed after September 2023 face indefinite processing delays. Claims filed before the moratorium are being processed, but slowly, with the IRS applying additional scrutiny. If your claim is legitimate, you should retain all supporting documentation including:

• Quarterly gross receipts figures for 2019, 2020, and 2021
• Documentation of any government orders that affected your operations
• Payroll records showing qualified wages
• Evidence of how your operations were suspended or limited
• Records showing your PPP loan amounts and forgiveness

The Withdrawal Option

If you filed an ERC claim that has not yet been processed and you now believe you may not be eligible, the IRS allows you to withdraw the claim. Withdrawal means the IRS will treat the claim as if it was never filed. You will not receive the credit, but you will also not face penalties or interest. This is the cleanest option for employers who were misled by promoters.

The Voluntary Disclosure Program

If you already received an ERC payment and later determined you were not eligible, the IRS voluntary disclosure program allows you to repay a portion of the credit and resolve the matter without full penalties. The specific terms of the program have varied, so check the current IRS guidance for details.

Moving Forward

The ERC remains a legitimate credit for employers who genuinely qualified, and many employers received it correctly. However, the aggressive promotion of the credit has created a landscape where the IRS is auditing claims heavily. If you are confident in your eligibility, ensure your documentation is in order. If you have doubts, explore the withdrawal or disclosure options before the IRS contacts you. The consequences of an erroneous claim that you voluntarily correct are far less severe than those of one the IRS identifies through audit.