Can I Still Claim Employee Retention Tax Credits in 2025?

Employee retention remains a critical focus for businesses, especially during periods of economic uncertainty. To encourage employers to retain their workforce, the U.S. government introduced the Employee Retention Credit (ERC) as part of the COVID-19 relief efforts. This initiative has provided significant financial support to businesses facing hardship. However, as we enter 2024, many business owners are curious about whether they can still claim the ERC. In this blog, we will explore the key aspects of the ERC, including its eligibility criteria, timelines, and required documentation.

What is the Employee Retention Credit?

The Employee Retention Credit (ERC) is a refundable tax credit designed to encourage businesses to retain employees during periods of economic distress. Initially introduced under the CARES Act in March 2020, the credit has since undergone several revisions and extensions through subsequent legislation, such as the Consolidated Appropriations Act (CAA) and the American Rescue Plan Act (ARPA).

Key provisions of the ERC include:

CARES Act (2020): Employers could claim 50% of qualified wages, up to $10,000 per employee annually.
CAA (2021): Increased the credit to 70% of qualified wages, up to $10,000 per employee per quarter.
ARPA (2021): Introduced Recovery Startup Provisions, allowing eligible startups to claim up to $50,000 per quarter in Q3 and Q4 2021.

Can You Still Claim ERC in 2025?

Although the ERC program officially ended, businesses can still file retroactive claims for eligible periods. The IRS has clarified that employers may amend prior tax returns to claim the credit for wages paid during the program’s active years.

Key Deadline:

April 15, 2025: Deadline to file amended returns for all quarters of 2021.

The retroactive claim process involves filing Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund) for the applicable quarters. It is essential to act promptly to meet these deadlines and secure any unclaimed credits.

Latest IRS Updates on ERC Claims

1. Moratorium Lifted:

The IRS had temporarily paused processing new ERC claims filed after September 14, 2023. As of January 31, 2024, this moratorium will be lifted, and the agency will resume processing claims. However, due to a high volume of submissions, refunds may take longer than usual to process.

2. Voluntary Disclosure Program (VDP):

Businesses that received ERC funds but later determined they were ineligible can participate in the IRS’s Voluntary Disclosure Program (VDP). This program, reopened until November 22, 2024, allows businesses to:

Repay 85% of the funds received.
Avoid audits, penalties, and interest if they comply fully.

3. Withdrawal Program:

Employers with pending claims can withdraw submissions if they believe their claims may not meet eligibility criteria. This option applies only to claims that have not yet been paid or deposited.

4. IRS Notifications:

The IRS has increased efforts to identify fraudulent or improper claims. Businesses may receive disallowance letters or recapture notices. If you receive such a notification, you have the right to appeal or rectify the situation through proper channels.

ERC Qualifications for Employers

Most employers, including colleges, universities, hospitals, and 501(c) organizations, became eligible for the ERC following the enactment of the American Rescue Plan Act (ARPA). Previously, the Consolidated Appropriations Act (CAA) expanded eligibility to include businesses that received loans under the Paycheck Protection Program (PPP), including borrowers who were initially excluded from claiming the ERC.

Eligibility is determined based on one of two factors:

1. Partial or Full Suspension of Operations:

A business qualifies if its operations were fully or partially suspended due to a government order related to COVID-19. However, eligibility only applies for the portion of the quarter during which the business was affected.

Exceptions: Essential businesses generally do not qualify unless they experienced significant disruptions to their supply chain. Similarly, businesses that shifted to telework without major operational interruptions may not qualify.

Significant Decline in Gross Receipts:

2020: Businesses that experienced a 50% or greater decline in gross receipts compared to the same quarter in 2019 qualify. Eligibility ends in the quarter after gross receipts recover to 80% of the 2019 level.
2021: The threshold for decline was reduced to 20%, broadening the scope of eligible businesses.

Changes by Legislative Acts

CARES Act – 2020:

Initial eligibility required a 50% decline in gross receipts.
The credit applied to 50% of qualified wages, up to $10,000 per employee annually.

Consolidated Appropriations Act – 2021:

Expanded eligibility to businesses with a 20% decline in gross receipts.
Allowed businesses with PPP loans to claim the ERC on non-overlapping wages.
Increased the credit to 70% of qualified wages, up to $10,000 per employee per quarter.

American Rescue Plan Act – 2021:

Introduced the Recovery Startup Business (RSB) provision, allowing new businesses to claim up to $50,000 per quarter in Q3 and Q4 of 2021.

Recovery Startup Businesses (RSBs)

Businesses that began operations after February 15, 2020, and had annual gross receipts under $1 million may qualify as RSBs. These entities are eligible for credits in Q3 and Q4 of 2021, up to $50,000 per quarter.

Key Requirements: Must not qualify under the gross receipts or suspension criteria. Eligible wages include all employee wages, regardless of the number of employees.

Infrastructure Investment and Jobs Act – 2021: This law simplified RSB eligibility by removing the requirement to show a decline in gross receipts or operational suspension in Q4 of 2021.

What Wages Qualify for the ERC?

Wages and compensation subject to FICA taxes generally qualify for the ERC. These include qualified health expenses paid after March 12, 2020, through the program’s end date, depending on the applicable quarter.

PPP Interaction: Wages forgiven or expected to be forgiven under PPP loans cannot be counted toward the ERC.
Health Expenses: Employer and employee pre-tax contributions to health plans are included. After-tax contributions are excluded.

Tipped Wages: IRS Notice 2021-49 clarified that tips subject to FICA taxes qualify as wages for the ERC, provided they exceed $20 in a calendar month.

Owner/Spouse Wages: Wages paid to majority owners and their spouses may not qualify, depending on attribution rules. If majority ownership applies, wages for relatives such as children or siblings are also excluded.

Note: Full-Time Employee Definition

For ERC purposes, a full-time employee is defined as one who worked at least 30 hours per week or 130 hours per month in 2019, based on the ACA’s employer shared responsibility provision.

How to Apply for the ERC Retroactively

Businesses looking to claim the ERC retroactively should follow these steps:

Evaluate Eligibility: Thoroughly review payroll and financial records to identify periods that meet the eligibility criteria, such as a significant decline in gross receipts or operational suspensions. Cross-reference your records with IRS guidelines to ensure compliance and avoid submitting ineligible claims.

Pro Tip: Create a checklist of eligibility criteria to streamline your review process and minimize the chances of overlooking potential qualifying periods.

File Form 941-X: Use Form 941-X to amend prior quarterly tax filings for the applicable quarters during which eligible wages were paid. Provide precise calculations of qualified wages and credits to support your claim, ensuring alignment with IRS requirements.

Pro Tip: Use payroll software or consult a tax professional to automate calculations and double-check data accuracy before submission.

Seek Professional Assistance: Engage with a tax advisor or CPA experienced in ERC claims to navigate complex regulations and avoid common pitfalls. Professional assistance can help identify overlooked opportunities for credits and ensure full compliance with IRS guidelines.

Pro Tip: Schedule a consultation with a tax expert early in the process to clarify uncertainties and optimize your claim strategy.

Required Documentation for Claiming the ERC

Accurate and thorough documentation is crucial when claiming the Employee Retention Credit (ERC). Proper records ensure compliance and help maximize your credit. Below is a detailed list of essential documents, along with pro-tips to streamline your process:

Accurate and thorough documentation is crucial to successfully claiming the ERC. Here’s a checklist of the essential records:

Payroll Records: Forms W-2 and W-3. Payroll summaries highlighting qualified wages.
Proof of Gross Receipt Declines: Quarterly financial statements or sales records demonstrating revenue drops.
Government Orders: Copies of official orders detailing operational restrictions.
Tax Forms: Filed Forms 941 for applicable quarters. Amendments made via Form 941-X.

What Businesses Should Know About ERTC Retroactive Termination Guidance

IRS Notice 2021-65 provides critical guidance for employers navigating the retroactive termination of the Employee Retention Tax Credit (ERTC) in the fourth quarter of 2021. Below are the key considerations:

1. Avoiding Failure-to-Deposit Penalties:

Employers (excluding Recovery Startup Businesses) who reduced employment tax deposits in anticipation of receiving the ERTC must meet specific deadlines outlined in Notice 2021-65 to avoid penalties. These deadlines ensure that deposits were reduced only for periods where the employer was genuinely eligible.

2. Repayment of Advanced ERTC Payments:

Employers who requested and received advanced payments for the fourth quarter of 2021 using Form 7200 are required to repay the funds. The repayment must be made by the due date of the applicable employment tax return that includes the fourth quarter of 2021.

3. Considerations for PEO/CPEO Customers:

Employers utilizing Professional Employer Organizations (PEOs) or Certified Professional Employer Organizations (CPEOs) must repay advanced payments through their PEO/CPEO accounts. Additionally, tax deposit reductions managed through these entities must be reconciled accurately.

4. Potential Penalties for Non-Compliance:

Failure to repay advanced payments or meet deposit deadlines can result in significant penalties. Employers should review Notice 2021-65 in detail and ensure all requirements are met to remain in good standing with the IRS.

Additional Considerations

1. No Double-Dipping:

Businesses cannot claim the same wages for both the ERC and other credits, such as the Paycheck Protection Program (PPP) forgiveness. Ensure wages used for PPP loan forgiveness are excluded from ERC claims.

2. Interaction with Other Funding Sources:

Payroll costs covered by grants like the Shuttered Venue Operators Grant (SVOG) or Restaurant Revitalization Fund (RRF) cannot be included in ERC calculations.

3. Refund Timelines:

While the IRS has resumed processing claims, refunds may take up to six months or longer, depending on the complexity of the claim and additional reviews.

Conclusion

The Employee Retention Credit has been a vital tool for businesses navigating economic challenges, offering valuable financial relief to support employee retention. Although the program is no longer active, businesses can still benefit by filing retroactive claims for eligible periods. Ensuring compliance with eligibility criteria, maintaining proper documentation, and meeting filing deadlines are critical steps in this process.

At NSKT Global, we specialize in helping businesses optimize their tax strategies and navigate complex regulations. Our experienced professionals can guide you through the process of claiming the ERC, providing tailored assistance to maximize your benefits. Contact us today to learn how we can support your business in achieving financial stability and compliance.