Employee Retention Credit: What You Need to Know in 2024

As of October 2024, the IRS is actively working through a backlog of 400,000 Employee Retention Credit (ERC) claims, totaling approximately $10 billion in potential refunds. The IRS has also paused new ERC claims until December 31, 2024 to address fraudulent submissions and ensure accurate processing.

The IRS introduced the ERC to support businesses impacted by the COVID-19 pandemic by offering refundable tax credits for wages paid during qualifying periods. However, many businesses filed claims during what IRS officials described as a “period of aggressive and misleading marketing.” This led to a significant number of improper and ineligible claims—posing a challenge to the agency’s review efforts.

IRS Commissioner Danny Werfel has stated that while legitimate claims are being processed and refunds are being issued, the IRS is conducting audits and fraud investigations to weed out erroneous claims. Businesses that already filed should expect longer processing times as the IRS works to separate eligible from ineligible applications. To help taxpayers, the agency is encouraging participation in its Voluntary Disclosure Program (VDP)—open until November 22, 2024—which allows businesses to amend incorrect claims without penalties or interest.

Navigating these changes is critical for businesses seeking ERC refunds or reconsidering previous filings. With heightened scrutiny, the IRS recommends companies consult with tax professionals and ensure their claims align with eligibility rules before submitting or correcting applications.

What Is the Employee Retention Credit (ERC)?

The Employee Retention Credit (ERC) is a refundable tax credit introduced under the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020. Its primary purpose was to help businesses retain employees and maintain payroll during the disruptions caused by the COVID-19 pandemic. The credit offsets employment taxes, allowing eligible employers to receive a percentage of wages paid to employees during certain periods when their operations were partially or fully suspended or when they experienced significant declines in revenue.

Although initially set to expire with the CARES Act, the ERC was later extended and expanded by subsequent relief packages, including the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act (ARPA). These changes increased the scope of the credit and allowed more businesses to qualify, even if they had also received Paycheck Protection Program (PPP) loans.

The ERC provides businesses with an opportunity to recover a significant portion of their payroll costs. However, 2024 brings additional challenges: the IRS is working through a backlog of claims and has temporarily paused new submissions due to a surge of fraudulent filings. For those still waiting for refunds or considering amending past claims, understanding how the ERC works is essential to navigating the current filing environment.

Who Qualifies and How Much Can You Claim?

Although new ERC claims are paused until December 31, 2024, businesses that submitted claims before the pause or need to amend previous filings can still qualify for refunds. Eligible businesses must amend returns using Form 941-X, and the deadline for 2020 claims is approaching on April 15, 2025. Here’s what to know about eligibility and potential refunds.

Eligibility Requirements

Businesses must meet one of the following criteria for relevant quarters in 2020 and 2021:

• Full or Partial Suspension of Operations: Business operations were restricted by government orders during the pandemic.
• Revenue Decline: 2020: Gross receipts declined by 50% or more compared to the same quarter in 2019. 2021: Gross receipts declined by 20% or more compared to the same quarter in 2019.
• Business Size Limits: 2020: Available for employers with 100 or fewer full-time employees. 2021: The threshold increased to 500 or fewer full-time employees.

Businesses that received PPP loans may still qualify for the ERC, but they cannot claim wages covered by forgiven PPP loans for the credit.

How Much Can You Claim?

Refunds are based on qualified wages paid during eligible periods. The credit amounts vary between 2020 and 2021:

• 2020: 50% of wages, with a maximum of $5,000 per employee for the year.
• 2021: 70% of wages, capped at $7,000 per employee per quarter, with a maximum of $28,000 per employee for the year.

Example: A business with 10 employees that qualifies for both years could receive $5,000 per employee for 2020 (totaling $50,000) and $28,000 per employee for 2021 (totaling $280,000).

Key Deadlines to Note

• April 15, 2025: The deadline to amend 2021 claims with Form 941-X.
• Claims filed before the December 2024 pause are still being processed, though the IRS has warned of delays due to increased audits and fraud investigations.

To avoid penalties, businesses should act quickly to submit amendments for earlier quarters and ensure all claims are well-documented. Given heightened IRS scrutiny, tax professionals recommend reviewing prior filings carefully.

How to Amend and Navigate IRS Changes in 2024

With new ERC claims paused until December 31, 2024, businesses must now focus on amending previously submitted filings. If you already filed a claim and want to make corrections or ensure compliance, here’s what you need to know.

How to Amend Your ERC Claim

Businesses that need to correct past claims must submit an amended Form 941-X for the relevant quarters in 2020 or 2021. It’s essential to gather the necessary documentation to support your amended claim:

• Payroll records showing eligible wages paid during qualifying periods.
• Revenue comparisons demonstrating the required decline in 2020 or 2021.
• PPP loan forgiveness documents confirming wages weren’t double-counted for ERC.

Claims submitted before the September 2023 moratorium are still being processed, but the IRS has warned of longer review times due to increased audits and compliance efforts.

The Voluntary Disclosure Program (VDP) offers businesses a way to withdraw or correct claims without penalties. This program, open through November 22, 2024, allows companies to repay 85% of the credit received, with no interest or penalties.

Key Deadlines

• November 22, 2024: Last day to participate in the Voluntary Disclosure Program.
• April 15, 2025: Final deadline to amend 2021 ERC claims with Form 941-X.

How to Avoid Common Mistakes

• Review wage calculations to ensure they align with ERC rules.
• Work with a tax professional to verify eligibility and avoid errors.
• Maintain detailed documentation in case of IRS audits.

Navigating these changes is essential for businesses seeking to correct or amend their ERC claims. With heightened scrutiny from the IRS, proactive steps can help avoid future penalties and ensure compliance.

Common ERC Filing Errors to Avoid

With the IRS increasing audits and investigations into Employee Retention Credit (ERC) claims in 2024, it’s essential to correct any errors in previous filings to avoid penalties. Here are the most common mistakes to look out for:

Double-Dipping with PPP Loans

You cannot claim the ERC for wages that were also covered by forgiven PPP loans. Ensure payroll records accurately allocate wages to avoid using the same wages for both programs.

Claiming for Ineligible Quarters

Some businesses mistakenly claim wages from quarters where they didn’t meet eligibility criteria. Eligibility requires either a significant revenue decline or a partial or full suspension of operations due to COVID-19-related government orders during specific periods in 2020 or 2021.

Filing Based on Misleading Marketing Claims

The IRS has flagged numerous claims as improper, stemming from aggressive ERC promoters who promised eligibility without assessing a business’s specific circumstances. Submitting a claim based on such advice may result in audits or the need to repay the credit with penalties.

Incomplete or Missing Documentation

Inadequate records are one of the most common reasons for delayed refunds or claim denials. Businesses must maintain detailed payroll summaries, proof of revenue declines, and loan forgiveness documents to support their ERC claims if audited.