On March 20, 2025, the IRS issued new FAQ’s as guidance to businesses understand how to properly report Employee Retention Credit (ERC) refunds on their income tax returns. This is especially important for companies that received ERC refunds but never amended their earlier tax returns, or for those whose claims were later denied.

Background on ERC

The ERC was created during the COVID-19 pandemic to help employers keep workers on payroll. It covered qualified wages paid between March 13, 2020, and September 30, 2021, with a longer period allowed for certain startup businesses. The IRS has received over 3.6 million claims, but due to fraud concerns and a backlog, the IRS stopped processing claims in September of 2023.

If You Got an ERC Refund but Didn’t Amend Your Tax Return

Many businesses received ERC refunds years after claiming the credit, but didn’t go back and change the original tax return to reduce wage deductions. The IRS now says: you don’t have to amend those old returns.

Instead, simply report the ERC refund as income in the year you got the check. For example, if you claimed the credit for 2020 but got the refund in 2024—and didn’t reduce your wage expense in 2020—you should include the refund in your 2024 income.

This approach follows the “tax benefit rule,” which says if you took a deduction in the past and later got a refund related to that deduction, you report it as income in the year you receive the refund.

If Your ERC Claim Was Denied After You Reduced Wages

Some businesses reduced wage deductions on a prior-year return expecting to receive the ERC, but then had their claim denied. In that case, you can increase the wage expense on your tax return for the year the denial becomes final.

So if you reduced your 2021 wage expense expecting the credit, and the IRS denied it in 2024, you can increase your 2024 wage expense.

If you’d rather fix it on the original return and the amendment window is still open, you can do that too—but it’s optional.

If It’s Too Late to Amend a Return

If your refund came after the amendment deadline passed, and you didn’t reduce wages on the original return, just report the refund as income in the year you received it. For example, a $100,000 ERC refund received in 2024 for 2021 wages would be reported as 2024 income.

Keep Good Records

No matter your situation, keep thorough documentation—ERC claims, wage calculations, and any corrections. This will be helpful if the IRS examines your return. Every case is different, so it’s best to work with a tax professional to ensure you’re handling things correctly.