Employee Retention Tax Credit: Latest Updates 2025

As 2025 approaches, businesses are navigating a new era of opportunities and challenges, especially when it comes to understanding tax programs that continue to impact them, such as the Employee Retention Credit (ERC). Originally introduced during the COVID-19 pandemic as a lifeline for struggling businesses, the employee retention credit remains relevant today as companies face audits, compliance checks, and opportunities to resolve past claims.

While the credit itself is no longer available for new claims, its legacy persists. Businesses must address lingering concerns about their past filings, including audits and repayments. This blog explores the updated significance of the Employee Retention Credit, offering insights into what employers need to know in 2025 to stay compliant and move forward confidently.

What Is the Employee Retention Credit (ERC)?

The Employee Retention Credit (ERC) was introduced as part of the CARES Act in 2020 to encourage businesses to retain employees during a period of widespread economic uncertainty. The credit was designed as a refundable tax benefit, meaning eligible businesses could receive a refund even if they had no tax liability.

Employee Retention Credit primarily applied to wages paid between March 12, 2020, and before January 1, 2022. its implications continue into 2025. Businesses still dealing with audits or resolving past claims need to understand its requirements and their obligations.

When this tax credit first came out, it covered 50% of qualified employee wages, capped at $10,000 per employee. That meant employers could get up to $5,000 in credit for wages paid between March 12, 2020, and before January 1, 2022.

In 2021, the rules got even better! The credit increased to 70% of qualified wages, and the wage limit jumped from $10,000 per year to $10,000 per quarter.

This credit is open to businesses of all sizes that paid eligible wages to their employees. However, the rules vary depending on the number of employees a business had specific guidelines apply to those with fewer than 100 employees and those with fewer than 500 employees during parts of 2020 and 2021.

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Key Features of the Employee Retention Credit

The ERC was designed to provide financial relief while encouraging workforce retention. Its key features include:

The simplicity of the ERC’s concept contrasts with its complex implementation, which required businesses to meet specific eligibility criteria and navigate detailed calculations.

Who Qualified for the Employee Retention Credit?

Eligibility for the ERC depended on meeting specific criteria related to business operations and revenue during the pandemic. Employers had to demonstrate that they were significantly impacted by COVID-19 to claim the credit.

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1. Government Order Suspension

Businesses that faced partial or full suspension of operations due to government-mandated closures or restrictions during the pandemic qualified for the Employee Retention Credit. This applied to scenarios like restaurants being limited to takeout services or retail stores operating at reduced capacity to comply with health guidelines. These measures, while necessary for public safety, caused significant disruptions, and the ERC was designed to help businesses manage the financial burden. By demonstrating how government orders impacted operations, eligible employers could claim the credit for wages paid during these challenging periods.

2. Revenue Decline

Another pathway to eligibility was a significant decline in gross receipts. In 2020, this meant a 50% reduction in revenue compared to the same quarter in 2019. In 2021, the threshold was reduced to a 20% decline, making it easier for businesses to qualify.

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3. Recovery Startup Businesses

The Employee Retention Credit also extended support to newer businesses classified as recovery startups. To qualify, these businesses had to have begun operations after February 15, 2020, and their annual gross receipts could not exceed $1 million. This provision was particularly beneficial for entrepreneurs who launched ventures during the pandemic, offering them a safety net as they navigated the unique challenges of starting a business in uncertain times. Eligible recovery startups could claim the ERC for the third and fourth quarters of 2021, providing vital support for their early growth stages.

How do you calculate the Employee Retention Credit?

The Employee Retention Credit is calculated based on qualified wages paid to employees during specific timeframes. For 2021, the credit is 70% of the qualified wages paid to employees. The maximum amount of qualified wages for any one employee per quarter is limited to $10,000 or with a maximum credit of $7,000 per quarter.

How to Claim Employee Retention Credit?

Eligible businesses that didn’t claim the credit when they filed their original employment tax return can claim the credit by filing adjusted employment tax returns. To claim the Employee Retention Credit, employers must file an amended payroll tax return using IRS Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return, or claim for Refund. Note that if you are Claiming Employee Retention Credit and using Form 941-X for filing, you must reduce your deduction for wages by the amount of the credit for that same tax period. As a result, you may need to amend your income tax return (Forms 1040, 1065, 1120, etc.) to reflect that reduced deduction.

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Preparing for Employee Retention Credit Audits in 2025

The IRS has clarified that it will continue scrutinizing ERC claims in 2025. To prepare for potential audits, businesses should take the following steps:

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1. Review Claims Thoroughly

One of the most important steps businesses must take when addressing their Employee Retention Credit (ERC) claims is to ensure they meet all eligibility requirements. While the ERC was a lifeline for many during the pandemic, its complexities meant that even small errors could lead to significant issues. Businesses should thoroughly review their claims to confirm that every detail aligns with the program’s criteria. This includes verifying that your business experienced a qualifying decline in revenue or was subject to a government-mandated suspension during the eligible periods. It’s equally important to check the accuracy of calculations for qualified wages, as even minor discrepancies can trigger audits or repayment demands. Double-checking claims now can save you from costly problems later, ensuring you maintain compliance with the IRS.

2. Maintain Comprehensive Records

When it comes to the Employee Retention Credit, comprehensive recordkeeping is not just a best practice; it’s a necessity. The IRS requires businesses to provide clear evidence supporting their ERC claims, making detailed documentation crucial. Employers should retain payroll records that show which employees were paid and when, along with calculations of the qualified wages claimed under the credit. Additionally, keep copies of financial documents that demonstrate declines in gross receipts and any government orders that restricted your operations. Organized, well-maintained records not only make it easier to navigate potential audits but also serve as a safeguard against disputes or penalties. By ensuring you have all the necessary documents in place, you can confidently substantiate your eligibility for the ERC.

3. Consult Tax Professionals

Navigating the complexities of the Employee Retention Credit can be challenging, especially for businesses unfamiliar with its detailed requirements. That’s why seeking guidance from a qualified tax professional is essential. A skilled advisor can help you determine whether your claims are accurate, identify any potential errors, and assist in resolving issues before they escalate. Tax professionals who specialize in ERC claims can also ensure you understand the nuances of the program, from calculating eligible wages to complying with reporting requirements. This expertise not only minimizes risks but also provides peace of mind, knowing that your ERC claims are handled with precision. Whether you’re addressing past claims or preparing for an audit, a knowledgeable tax professional is an invaluable resource in navigating the ERC process.

How to Resolve Employee Retention Credit Issues in 2025

For businesses that need to address past ERC claims, the IRS provides several options:

1. Withdraw or Repay Improper Claims
If a claim hasn’t been processed or paid, employers can withdraw it. Businesses that have already received the credit can repay it through the IRS Voluntary Disclosure Program to avoid penalties.

2. Appeal Disallowed Claims
Employers who receive IRS Letter 105-C, disallowing their employee retention credit claim, can:

• Request an administrative appeal.
• Seek a review by the IRS Independent Office of Appeals.
• File a lawsuit if they disagree with the decision.

3. Monitor IRS Updates
The IRS frequently updates its guidance on ERC-related issues. Staying informed is key to resolving disputes efficiently.

Avoiding Employee Retention Credit Scams in 2025

Unfortunately, employee retention credit scams continue to target businesses even as the program winds down. Promoters often promise quick refunds without assessing eligibility, leading to improper claims and financial consequences.

Warning Signs of Employee Retention Credit Scams:

• Claims that “every business qualifies” for the credit.

• High upfront fees or fees based on a percentage of the refund.

• Promoters who offer quick eligibility checks without reviewing records.

• Statements that encourage filing claims with no risk.

To protect your business, work only with trusted professionals and avoid unsolicited offers.

Conclusion

While the employee retention credit was designed as a temporary relief measure, its impact continues to be felt in 2025. Businesses must stay vigilant in addressing past claims, preparing for audits, and avoiding scams. By taking proactive steps and seeking expert guidance, employers can navigate the complexities of employee retention credit and focus on building a strong future. The lessons learned from the ERC’s challenges underscore the importance of accurate documentation, compliance, and informed decision-making as we move into the new year.

FAQs

1. What should I do if my employee retention credit claim hasn’t been paid yet?

If your claim hasn’t been processed or paid, you can withdraw it to avoid potential penalties or interest if it was improperly filed. Contact the IRS to initiate the withdrawal process.

2. What are the consequences of filing an improper employee retention credit claim?

Filing an improper employee retention credit claim can result in audits, repayment of the credit, penalties, and interest. Businesses that knowingly submit fraudulent claims may face additional legal consequences.

3. How do I appeal if my employee retention credit claim is disallowed?

You can appeal through the IRS Independent Office of Appeals if the IRS disallows your employee retention credit claim. If necessary, you may also file a lawsuit to challenge the decision.

4. Can I resolve an employee retention credit repayment without penalties?

Yes, the IRS offers the Voluntary Disclosure Program, allowing businesses to repay improper ERC claims without incurring severe penalties. This is a helpful option for those who want to correct mistakes proactively.

5. What are the risks of working with third-party employee retention credit promoters?

Third-party employee retention credit promoters often advertise quick refunds or easy qualifications. These promoters may encourage improper claims, leaving businesses liable for repayment and penalties. Always consult a trusted tax professional instead.

6. How can I ensure compliance during an employee retention credit audit?

Prepare for an audit by maintaining thorough documentation of your employee retention credit claims, including revenue records, payroll data, and evidence of government orders affecting operations. Accurate and complete records are essential to demonstrate compliance.

7. Are there specific IRS forms required for amending ERC-related claims?

Yes, businesses use Form 941-X to amend prior employment tax returns and correct ERC claims. Ensure all adjustments are reflected in your income tax filings to avoid discrepancies.

8. What should businesses watch for in ERC-related scams?

Be cautious of high-pressure tactics, unsolicited offers, and claims that “every business qualifies.” Avoid promoters who charge upfront fees or base their fees on the credit amount claimed.

9. Does the IRS provide penalty relief for ERC-related issues?

The IRS offers penalty relief for eligible cases, particularly if businesses act in good faith to correct improper claims. Consult the IRS guidelines or a tax advisor to determine if you qualify.

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