The Employee Retention Credit (ERC) offers businesses a refundable tax credit to support payroll during the COVID-19 pandemic. Designed to help employers keep employees on payroll during tough times, the ERC offers a refundable tax credit. However, with the program evolving and deadlines approaching, staying informed is critical. It provides a detailed look at the ERC tax credit status in 2025, including updates, deadlines, and actionable steps for businesses.

What Is the Employee Retention Credit?

The ERC, also known as the Employee Retention Tax Credit (ERTC), is a refundable payroll tax credit introduced under the CARES Act in 2020. It supports businesses and tax-exempt organizations that faced disruptions due to the COVID-19 pandemic. Eligible employers can claim a credit for qualified wages paid to employees between March 13, 2020, and December 31, 2021.

Key Updates for the ERC in 2025

The ERC program has seen significant changes in 2025, with new IRS guidance and processing updates. Below are the latest developments:

IRS Processing Progress and Backlog

The IRS is actively processing around 400,000 ERC claims, valued at approximately $10 billion. Despite progress, a backlog of over 597,000 claims remains, causing delays for many businesses. The IRS has prioritized low-risk claims but continues to scrutinize applications due to widespread fraudulent claims. A moratorium on processing claims filed after January 31, 2024, remains in place, meaning new claims are unlikely to be processed soon.

New IRS Guidance on Wage Deductions

In March 2025, the IRS released updated FAQs to simplify compliance for businesses dealing with ERC-related wage deductions. Key points include:

• Unamended Returns: If a business received an ERC refund but didn’t reduce wage expenses on its original tax return, it can report the refund as gross income in the year it was received, avoiding the need to amend prior returns.

• Disallowed Claims: If an ERC claim is denied after a business reduced its wage expenses, it can increase wage expenses on the current-year return to reflect the disallowance, eliminating the need for an amended return.

This guidance helps businesses avoid “whipsaw” scenarios, where they face double taxation due to mismatched deductions and refunds.

Moratorium and Fraud Investigations

The IRS imposed a moratorium on processing new ERC claims after January 31, 2024, to address fraudulent filings. This pause continues, and claims filed after this date face significant delays. The IRS has intensified audits and criminal investigations, targeting improper claims driven by misleading marketing from some promoters. Businesses are urged to review their eligibility carefully to avoid penalties.

Voluntary Disclosure and Withdrawal Programs

The IRS reopened its Voluntary Disclosure Program (VDP) through November 2024, allowing businesses to repay 80% of incorrect ERC refunds without penalties or interest. The claim withdrawal program remains open for unprocessed claims or uncashed refund checks, enabling businesses to avoid audits by withdrawing ineligible claims.

ERC Deadlines in 2025

The deadlines for claiming the ERC are critical for businesses to understand:

Final Filing Deadline for 2021 Claims

April 15, 2025, marks the final deadline to file ERC claims for 2021 quarters by submitting amended Form 941-X. The deadline for 2020 claims expired on April 15, 2024. Businesses must act quickly to file for 2021 credits before this statute of limitations closes.

Appeal Deadlines for Denied Claims

If the IRS issues a denial letter (Letter 105-C or 106-C), businesses typically have 30 days to file an appeal with the IRS Independent Office of Appeals. However, the IRS has extended this timeframe in some cases, allowing up to two years from the disallowance date to file a suit or appeal.

Action Steps for Businesses

To navigate the ERC in 2025, businesses should take the following steps:

1. Verify Eligibility

Review your business’s eligibility for the ERC based on IRS criteria:

• Full or Partial Suspension: Operations were fully or partially suspended due to government orders related to COVID-19.

• Gross Receipts Decline: A significant drop in gross receipts compared to 2019 (50% decline for 2020, 20% for 2021).

• Recovery Startup Business: Businesses that began operations after February 15, 2020, and meet specific revenue thresholds may qualify for 2021’s third or fourth quarters.

Consult a trusted tax professional to confirm eligibility and avoid errors. Misleading promotions have led to ineligible claims, so thorough documentation is crucial.

2. File or Amend Form 941-X

For 2021 claims, file an amended Form 941-X before April 15, 2025. Ensure accurate calculations of qualified wages and exclude wages used for Paycheck Protection Program (PPP) loan forgiveness. If you’ve already filed, check the status by contacting the IRS at 800-829-4933 or requesting a formal transcript through your tax advisor.

3. Address Denied Claims

If you receive a denial letter, act within the 30-day window (or extended period) to file an appeal. Prepare a detailed submission outlining your eligibility, supported by documentation like government orders or financial records. Alternatively, consider filing a federal lawsuit under Section 7422, though this is costly and should be a last resort.

4. Correct Wage Deduction Issues

If you received an ERC refund but didn’t amend your income tax return, include the refund as gross income on your 2025 return. For disallowed claims, adjust wage expenses on your current-year return. Consult a tax professional to ensure compliance and avoid penalties.

5. Consider Legal Action for Delays

For significant delays, some businesses are pursuing lawsuits against the IRS to expedite refunds. This approach, handled by the Department of Justice’s Civil Tax Division, can force action but requires legal counsel. Evaluate costs and benefits before proceeding.

Conclusion

The ERC remains a valuable opportunity for businesses impacted by the COVID-19 pandemic, but 2025 is a critical year with the April 15 deadline for 2021 claims approaching. Stay proactive by verifying eligibility, filing accurate claims, and addressing any denials promptly. The IRS’s updated guidance and ongoing efforts to clear the backlog provide clarity, but careful compliance is essential to avoid audits or penalties. Work with a trusted tax professional to navigate these complexities and secure the credits your business deserves. Act now to ensure you don’t miss out on this financial relief.