Employee Retention Credit: What Business Owners Need to Know in 2026

The Employee Retention Credit (ERC) was one of the most valuable relief programs to emerge from the COVID-19 pandemic. But for many small business owners, the story didn’t end with the claim. The IRS has ramped up audits and investigations into ERC claims, and businesses that received the credit may now be facing scrutiny, repayment demands, or compliance issues.

In this post, we’ll break down what you need to know about ERC audits and compliance.

What Is The Employee Retention Credit?

The Employee Retention Credit was a refundable tax credit for employers that was put into law through the CARES Act. Further legislation made the credit accessible to more employers. This credit was used to offset employment taxes paid by an employer to offer relief due to the coronavirus pandemic.

The Employee Retention Credit served as an incentive for employers to keep employees on staff. It was created to help offset employer costs while preserving jobs.

What Does ERC Stand For?

ERC stands for the “employee retention credit,” a tax credit available for business owners impacted by COVID-19. ERC is sometimes referred to as ERTC, or “employee retention tax credit.”

How Did The Employee Retention Tax Credit Work?

The employee retention tax credit was initially claimed on quarterly tax returns and provided immediate relief to employers by reducing employment tax deposits. If the amount of the credit exceeded the amount of employment tax deposits due, employers could request an advance payment from the IRS.

What Was The Deadline For The Employee Retention Tax Credit?

ERC deadlines have already passed. The deadline to file an amended return to receive the ERC for filing year 2020 was April 15, 2024. The deadline for filing an amended return to receive the ERC for filing year 2021 was April 15, 2025.

Who Qualified For The ERC Tax Credit?

To claim the Employee Retention Tax Credit, businesses had to meet several requirements, including paying qualifying wages to at least one employee. A business or tax-exempt organization also had to meet one of the following conditions:

There were also rules surrounding employees who were claimed under the ERC credit:

• For 2020, businesses with over 100 full-time employees could claim the credit for wages on employees who were retained but not working.
• For 2021, businesses with over 500 full-time employees could only claim the credit for wages on employees who did not provide services.

Some business did not qualify for the tax credit, including:

How Much Was The Employee Retention Tax Credit?

Employers could claim 50% of eligible wages up to $10,000 paid per employee per quarter from March 13, 2020, through December 31, 2020. A maximum of $5,000 per eligible employee could be claimed in 2020.

The rules changed for 2021. Under the new rules, employers could claim up to 70% of the first $10,000 of qualified wages paid from January 1, 2021, through September 30, 2021. The maximum limit was $7,000 per quarter per employee, for a maximum amount of $21,000 per employee per year.

Some employers could also qualify for ERC for wages paid from October 1, 2021, through December 31, 2021. To qualify, the employer had to be classified as a recovery startup business.

What Were Qualified Wages For The ERC?

Qualified wages for the ERC were wages subject to FICA taxes. In addition to wages and compensation, certain healthcare expenses also counted as qualified wages when calculating the employee retention credit.

Wages that were not qualified include:

• Wages paid to relatives
• Wages that were used to qualify for a Paycheck Protection Program (PPP) loan
• Wages that were used to qualify for PPP loan forgiveness
• Wages that an employer received a paid sick and family leave credit for under the Families First Coronavirus Response Act
• Wages paid to an employee for whom the employer received a Work Opportunity Tax Credit

Is The Employee Retention Credit Taxable?

If you claimed the ERTC, how will it impact your federal tax return? Per the IRS:

An employer receiving a tax credit for qualified wages, including allocable qualified health plan expenses, does not include the credit in gross income for federal income tax purposes. Neither the portion of the credit that reduces the employer’s applicable employment taxes, nor the refundable portion of the credit, is included in the employer’s gross income.

In short, the ERC is not included in gross income; therefore, the credit is not taxable. However, there are some expense disallowance rules that may impact your tax return after receiving the ERC. While ERC isn’t added to your gross income, it does affect the deduction you take for wages and salaries. This reduced deduction will increase your taxable income.

You can speak to your accountant or a tax professional to learn more about how the ERC will affect your taxes.

Is The IRS Auditing ERC Claims?

For businesses that claimed the Employee Retention Credit, the end of the program doesn’t mean it’s over.

According to a 2025 report from the Government Accountability Office, the IRS processed nearly 5 million ERC claims and paid out approximately $283 billion in total, making it one of the largest tax credit programs in U.S. history. Yet the program’s scale also made it a major target for fraud, and the IRS has responded aggressively.

The agency has sent 28,000 disallowance letters to ineligible claimants, saving an estimated $5 billion, while over 400 criminal cases are currently in progress. The IRS has also issued roughly 30,000 recapture letters demanding repayment of credits already paid, representing more than $1 billion in claims. As of early 2026, approximately 41,000 claims remain under exam or appeal.

The IRS has also increased scrutiny of the third-party promoters who encouraged businesses to file ERC claims, meaning liability may extend beyond the businesses themselves.

With enforcement expected to continue for years, businesses that claimed the ERC should be prepared to respond if contacted by the IRS.

How The One Big Beautiful Bill Affects ERC Claims

Signed into law on July 4, 2025, the One Big Beautiful Bill (OBBB) introduced significant changes to the ERC program that every business owner with a pending or paid claim should understand.

Late Claims Are Now Disallowed

The OBBB retroactively disallows any ERC claims for the third and fourth quarters of 2021 that were filed after January 31, 2024. This is notable because the statutory deadline for those claims was April 15, 2025 — meaning businesses that filed a valid, timely claim in good faith may still have it denied simply because it was submitted after the January 31, 2024 cutoff. If your claim has already been paid, you are not affected by this provision.

If you received a disallowance notice and believe your claim was filed on or before January 31, 2024, you do have the right to appeal to the IRS Independent Office of Appeals.

The Statute Of Limitations Is Now Six Years

Previously, the IRS had five years to audit ERC claims for Q3 and Q4 of 2021. The OBBB extends that window to six years, and the clock starts from the date the ERC claim was filed, not the original payroll tax return. That means the IRS could potentially audit a claim filed on January 31, 2024, as late as early 2030.

This extension applies only to Q3 and Q4 2021 claims. Claims for 2020 and Q1/Q2 2021 have already passed their statute of limitations.

New Penalties For ERC Promoters

The OBBB also increases scrutiny of third-party firms that helped businesses file ERC claims. Promoters who charged contingency fees and derived significant revenue from ERC services are now subject to stricter due diligence requirements and a $1,000 penalty per violation. A 20% penalty on erroneous refund claims has also been extended to cover ERC claims.

What To Do If You Already Claimed The ERC

If your business previously filed an ERC claim, your next steps depend on where things stand. Here’s how to think through your situation.

If your claim was paid and you haven’t heard from the IRS, that doesn’t mean you’re in the clear. With the statute of limitations now extended to six years for Q3 and Q4 2021 claims, the IRS has a long runway to revisit paid claims. The most important thing you can do right now is gather and retain your documentation:

• Payroll records for every quarter you claimed the ERC
• Tax returns showing how you accounted for the credit
• Revenue comparisons that demonstrate your eligibility
• Government shutdown orders, if that was the basis for your claim
• Documentation showing you did not “double dip” wages with PPP forgiveness

If you received a disallowance letter, don’t ignore it. The IRS issues Letter 105-C for full disallowances and Letter 106-C for partial disallowances. These letters typically give you 30 days to respond with supporting documentation. If you believe your claim was valid, you have the right to appeal to the IRS Independent Office of Appeals. Consult a tax professional or tax attorney before responding.

If your claim is currently under audit, the IRS will typically begin with an Information Document Request (IDR) asking for records that support your eligibility and calculations. Respond thoroughly and on time. A tax attorney familiar with ERC audits is your best resource here.

If you’re unsure whether your original claim was accurate, it’s worth having a qualified tax professional review it proactively. Voluntarily addressing an error before the IRS flags it is almost always better than waiting.

Regardless of your situation, the IRS strongly recommends working with a reputable tax professional (not a third-party ERC promoter) to navigate any outstanding compliance questions.

The Bottom Line On The Employee Retention Tax Credit

The Employee Retention Credit filing window is closed, enforcement is ramping up, and the IRS has made clear it intends to scrutinize ERC claims for years to come.

If your business claimed the ERC, the most important things you can do right now are straightforward: retain your documentation, understand your compliance obligations, and consult a qualified tax professional if you have any questions about your claim.

The bottom line is this: the ERC program may be over, but your responsibilities as a claimant are not. Stay informed, stay compliant, and don’t wait for the IRS to come to you.