Employee Rebate Credit: What It Is and How to Claim It

The Employee Retention Credit (ERC), also known as the Employee Retention Tax Credit (ERTC), was established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. The goal of the ERC was to provide a financial incentive for businesses to keep employees on payroll during the COVID-19 pandemic, even if their operations were curtailed.

This incentive is a refundable tax credit claimed against an employer’s share of certain payroll taxes. It was claimed on a business’s quarterly federal tax filing, Form 941, not on an annual income tax return. The program was designed to compensate businesses for lost revenue and disruptions from government-mandated restrictions. Although the program has ended, its effects, including audits and processing of prior claims, are ongoing.

Determining Employer Eligibility

An employer’s qualification for the Employee Retention Credit hinged on meeting one of two tests for a given calendar quarter. The first test is a significant decline in gross receipts. For 2020, a business qualified if its gross receipts for a quarter fell below 50% of the gross receipts from the same quarter in 2019. Eligibility continued for subsequent quarters until its gross receipts exceeded 80% of the amount from the corresponding 2019 quarter.

The rules became more accessible for the 2021 calendar year. For the first three quarters of 2021, the threshold for the gross receipts decline was lowered to 20% when compared to the same quarter in 2019. An alternative rule for 2021 also permitted employers to use the gross receipts from the immediately preceding calendar quarter and compare them to the same quarter in 2019 to determine eligibility.

The second test for eligibility is a full or partial suspension of business operations due to a government order. This requires that a federal, state, or local government mandate limited commerce, travel, or group meetings due to COVID-19. A partial suspension means that more than a nominal portion of the business’s operations were affected, which the IRS defines as less than 10% of total gross receipts or employee service hours compared to the same quarter in 2019.

The eligible period for which employers could claim the credit spanned from March 13, 2020, through September 30, 2021, for most businesses. The Infrastructure Investment and Jobs Act later retroactively terminated the ERC for the fourth quarter of 2021 for most employers. However, a “recovery startup business,” which began operations after February 15, 2020, remained eligible to claim the credit through the end of 2021.

Calculating the Credit Amount

The credit calculation, which differed between 2020 and 2021, is based on “qualified wages” paid to employees. The definition of these wages depends on the employer’s size, based on 2019 averages. For 2020, the threshold was 100 full-time employees. For businesses with 100 or fewer employees, all wages qualified, but for those with more than 100 employees, only wages paid to employees for not providing services qualified.

For the 2020 tax year, the credit was calculated as 50% of qualified wages, with a maximum of $10,000 in wages per employee for the entire year. This meant the maximum credit an employer could receive for any single employee for all of 2020 was $5,000. This applied to wages paid between March 13, 2020, and December 31, 2020.

The rules were expanded for 2021, and the employee threshold for determining qualified wages was increased to 500 full-time employees. For employers with 500 or fewer employees, all wages paid during an eligible quarter qualified. For those with more than 500 employees, the rule limiting qualified wages to only those paid to non-working employees continued to apply.

The credit formula for 2021 was also more generous, calculated as 70% of qualified wages. The wage limit was increased to $10,000 in wages per employee, per quarter. This change meant a business could claim a credit of up to $7,000 per employee for each of the first three quarters of 2021, for a potential annual maximum of $21,000 per employee.

A component of qualified wages was the inclusion of employer-paid health plan expenses, which could be treated as qualified wages even for furloughed employees. The same wages used to support Paycheck Protection Program (PPP) loan forgiveness could not be used for the ERC calculation. An employer had to allocate wages between the two programs.

Required Information and Documentation

To substantiate an Employee Retention Credit claim, a business must maintain specific records for any potential inquiries or audits from the IRS. This documentation includes detailed payroll records for each employee for every quarter the credit was claimed, clearly showing gross wages paid.

To prove eligibility under the gross receipts test, a business needs quarterly gross receipts information for 2019, 2020, and 2021 for comparison. If eligibility was based on a business suspension, the employer must retain copies of the specific government orders from federal, state, or local authorities that caused the shutdown.

Documentation related to other pandemic relief programs is also necessary. If the business received a Paycheck Protection Program loan, the PPP loan forgiveness application is needed to show which wages were used for forgiveness. Records detailing the employer’s contributions to employee health care costs are also needed, as these amounts could be included in the qualified wage calculation.

The Process for Claiming the Credit

The deadlines to file new claims for the Employee Retention Credit have passed. The deadline for claims related to 2020 was April 15, 2024, and the deadline for 2021 quarters was April 15, 2025.

Previously, businesses that did not claim the credit on their original quarterly tax return could retroactively file for it using Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund. A separate form was required for each quarter a refund was claimed.

After submission, businesses faced a significant waiting period due to the IRS’s substantial backlog in processing ERC claims. It can take many months, sometimes over a year, for a claim to be processed. The IRS may also correspond with a business to request further information to verify a claim’s accuracy.

IRS Scrutiny and Compliance

The Employee Retention Credit program has been subject to IRS scrutiny due to a high volume of improper claims. In response to concerns about fraud and aggressive marketing, the IRS announced a moratorium on processing new ERC claims filed after September 14, 2023. This pause was implemented to allow the agency to enhance its review procedures and combat fraudulent submissions from “ERC mills.” As of mid-2025, this moratorium remains in effect.

Businesses should be aware of the warning signs of these aggressive promoters. These signs often include promises of guaranteed eligibility without a thorough review of financial records, charging large upfront fees, or basing their fee on a high percentage of the expected refund. Such promoters may not adequately advise clients on eligibility or documentation requirements.

The IRS is actively auditing ERC claims and has allocated considerable resources to these examinations. Employers who have claimed the credit may be selected for an audit and will be required to produce documentation proving their eligibility and credit calculation. Failure to provide this support can result in the denial of the credit and the imposition of penalties and interest.

For businesses that may have filed an improper claim, the IRS provided specific relief options. The ERC Voluntary Disclosure Program, which allowed taxpayers to repay the credit at a discount, ended on March 22, 2024. However, the ERC claim withdrawal process remains available for employers whose claims have not yet been paid to retract their submission without penalty.