Employee Retention Credit: What to Know in 2025

More than five years ago, COVID-19’s spread reached pandemic status. Today, in 2025, U.S. taxpayers are still feeling its effects on the economy, society, and … their taxes. 

The employee retention credit (ERC) was one of many U.S. programs that sought to protect U.S. businesses from the economically chilling effects of the pandemic. Five years later, as the final ERC claims deadline approaches, more than 1 million taxpayers are waiting to know the status of their claims. 

Here are the top five things to know about the program in 2025. 

What is the Employee Retention Credit? 

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted in March 2020, created the ERC to help struggling businesses through the throes of the COVID-19 pandemic. The Paycheck Protection Program (PPP) is another product of the CARES Act. 

The ERC, a fully refundable tax credit, provides cash to businesses that had employees and saw significant revenue declines or were forced to partially or fully close in 2020 or the first three quarters of 2021. Some start-up businesses are also permitted to file claims related to losses in the fourth quarter of 2021. 

The credit amount depends primarily on the amount of qualified wages paid during the quarters when the business meets the ERC’s criteria. The credit’s rules and computation changed from 2020 to 2021, so the maximum credit amount ranges from $5,000 to $7,000 per employee per quarter. 

5 Things To Know About the ERC in 2025 

1. Claims for a 2021 ERC are Due by April 15, 2025 

The period for filing 2020-related claims has passed, but businesses may still file 2021 ERC refund claims through April 15, 2025, by filing amended Forms 941. 

There’s one important caveat here: The U.S. Congress has raised the possibility of retroactively closing of the ERC program. If enacted, claims filed today could be automatically denied, regardless of their merit. 

2. The IRS Isn’t Processing New ERC Claims 

Despite accepting new claims, the IRS isn’t processing them for the time being. 

According to the IRS, the ERC program has been a hotbed for fraud. The agency claims that bad actors set up so-called ERC mills to file claims on behalf of businesses that either aren’t eligible for the ERC or are eligible for a much smaller amount than claimed. 

The rise in fraudulent claims prompted the IRS to announce a moratorium on processing new claims. According to the agency’s most recent update on the matter, the IRS is only processing claims received on or before January 31, 2024.  

For the claims the IRS is currently processing, it’s focused on the most extreme ends of the risk spectrum. According to the agency, claims that are least likely to be incorrect should be processed quickly, and those that are most likely to be incorrect are receiving a high level of scrutiny. 

3. The IRS Has a Backlog of More Than 1 Million ERC Claims 

If you’ve been waiting a while to hear back from the IRS on your ERC claim, you aren’t alone. As of October 2024, the IRS had about 400,000 claims in process with another 1.2 million claims in its backlog.  

According to Bloomberg Tax, that 1.2 million figure might not include claims filed after the January 31, 2024, moratorium, which could mean that the actual backlog is much greater. 

In December 2024, then-IRS Commissioner Daniel Werfel announced plans to process 500,000 more claims in 2025. It’s unclear if that’s still the plan, given the level of changes at the agency since the new presidential administration began in January 2025. 

4. If the IRS Denied Your ERC Claim: You Have Options 

The IRS has denied thousands of ERC claims by issuing disallowance letters. There are three common types of disallowance letters: 

• Letter 6577-C, ERC Recapture, asks taxpayers to return all or a portion of ERC funds already received. These letters point out discrepancies among a taxpayer’s various filings that led the IRS to make a retroactive full or partial denial of the ERC claim. 

• Letter 105-C, Disallowance of the ERC, informs taxpayers that their ERC claim has been fully denied. The notice comes before the taxpayer has received any ERC funds. 

• Letter 106-C, Partial Disallowance of the ERC, tells taxpayers that a portion of their ERC claim has been denied. Like Letter 105-6, this letter is typically delivered before any ERC claims have been deposited. 

 If you received one of these letters and believe your ERC claims was wrongfully denied, you have two options to protest the IRS’s decision: 

• Small case request: Also known as an informal protest, small case requests are available to taxpayers with claims of up to $25,000 for each tax period. However, cases involving partnerships or S corporations aren’t eligible a small case request, regardless of the dollar amount. The process requires writing a brief written statement explaining why you believe the claim shouldn’t have been disallowed.  

• Formal written protest: A formal written protest is how most denied ERC claims will be protested. Compared to a small case request, a formal written protest requires a more involved written explanation of the taxpayer’s situation. 

Those who have had their ERC claims denied through an IRS audit may, likely after an appeal, seek judicial review from a federal judge either in your local U.S. District Court or the U.S. Court of Federal Claims in Washington D.C. 

You typically have up to two years from the letter’s date to file an informal or formal protest or file suit. 

5. If You Haven’t Heard Back From the IRS on Your ERC Claim: You Have Options 

Taxpayers might be able to accelerate their ERC claims processing by filing suit against the U.S. government.  

In general, you can sue the IRS after six months of the agency’s inaction on your ERC refund claim. Depending on the circumstances, the claim can be filed in your local U.S. District Court or the U.S. Court of Federal Claims in Washington, D.C. These cases generally aren’t heard by the U.S. Tax Court. 

If you’ve received an IRS disallowance letter related to your ERC claim, you have two years to file suit against the U.S. government to seek a different result. However, if you haven’t heard from the IRS about your claim, the two-year time limit may not apply, meaning that you can file suit at any time. However, filing suit comes with legal costs that may only be justified by high-dollar ERC claims. 

Smith + Howard: Your ERC Claim Advisor 

Since the ERC program was announced, Smith + Howard advisors have worked with scores of U.S. businesses apply for ERC funds that keep their businesses thriving.  

Contact a Smith + Howard advisor if you believe your business may qualify for an ERC.