Employee tax credit is not the name of anything in the Internal Revenue Code. It is a loose phrase, and almost every page that ranks for it means the Employee Retention Credit, which the IRS describes as a refundable tax credit for certain eligible businesses and tax-exempt organizations that had employees and were affected during the COVID-19 pandemic, adding that the ERC is not available to individuals (IRS, Employee Retention Credit).
Two other employer credits get called by the same loose name, and they work differently enough that the confusion matters. Both are set out below.
The Employee Retention Credit, as the IRS Frames It
The credit is available to eligible employers that paid qualified wages to some or all employees after March 12, 2020, and before Jan. 1, 2022, and eligibility and credit amounts vary depending on when the business impacts occurred. Generally the businesses and tax-exempt organizations that qualify are those that were suspended by a government order due to the COVID-19 pandemic during 2020 or the first three calendar quarters of 2021, or experienced the required decline in gross receipts during those same periods, or qualified as a recovery startup business for the third or fourth quarters of 2021 (IRS, Employee Retention Credit).
The requirements are different depending on the time period claimed, which is why a single description of the credit tends to be wrong for at least one quarter.
Two exclusions sit on top. Employers cannot claim the ERC on wages that were reported as payroll costs for Paycheck Protection Program loan forgiveness, and qualified wages do not include payroll costs in connection with shuttered venue operators grants or restaurant revitalization grants (IRS, Employee Retention Credit).
The only way to claim the ERC is on a federal employment tax return (IRS, Employee Retention Credit).
The Code Section Covers One Quarter, Not the Whole Program
There is a section of the Code named for this credit, and its own application clause is narrow. It reads in full:
“This section shall only apply to wages paid after June 30, 2021, and before October 1, 2021 (or, in the case of wages paid by an eligible employer which is a recovery startup business, January 1, 2022)” (26 U.S.C. 3134(n), 2024 edition).
So the codified version governs the third calendar quarter of 2021, and the fourth as well for a recovery startup business. Everything the IRS says about 2020 and about the first two quarters of 2021 rests on other legislation, not on this section. Quoting 3134 as though it described the whole credit is a scope error, and it is an easy one to make because the section is titled for the credit as a whole.
What the Codified Version Says
The rate and the base. In the case of an eligible employer, there shall be allowed as a credit against applicable employment taxes for each calendar quarter an amount equal to 70 percent of the qualified wages with respect to each employee of such employer for such calendar quarter (26 U.S.C. 3134(a), 2024 edition).
The caps, and there are two different ones. The amount of qualified wages with respect to any employee which may be taken into account for any calendar quarter shall not exceed $10,000. For an eligible employer which is a recovery startup business, the amount of the credit allowed for any calendar quarter, after applying that wage cap, shall not exceed $50,000 (26 U.S.C. 3134(b)(1), 2024 edition). One is a limit on wages counted, the other is a limit on the credit itself.
Which tax it runs against is narrower than “payroll taxes”. Applicable employment taxes means the taxes imposed under section 3111(b), and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b) (26 U.S.C. 3134(c)(1), 2024 edition). Section 3111(b) is the employer’s hospital insurance tax, the 1.45 percent Medicare side (26 U.S.C. 3111(b), 2024 edition). The employer’s 6.2 percent old-age, survivors and disability tax under 3111(a) is not what this credit offsets. Which charges sit inside the wider term are in payroll tax.
Refundability follows from that. The credit for a quarter cannot exceed those applicable employment taxes, reduced by any credits allowed under sections 3131 and 3132, and any excess shall be treated as an overpayment that shall be refunded under sections 6402(a) and 6413(b) (26 U.S.C. 3134(b)(2) and (b)(3), 2024 edition).
Two Limbs, and Three Routes Inside the Second
The eligibility definition is where loose paraphrases go wrong, because the joiners are not all the same.
Eligible employer means any employer which was carrying on a trade or business during the calendar quarter for which the credit is determined, and with respect to any calendar quarter for which one of three things is true: the operation of that trade or business is fully or partially suspended during the quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings, for commercial, social, religious, or other purposes, due to COVID-19; or the gross receipts of the employer, within the meaning of section 448(c), for that quarter are less than 80 percent of the gross receipts of the employer for the same calendar quarter in calendar year 2019; or the employer is a recovery startup business (26 U.S.C. 3134(c)(2)(A), 2024 edition).
The trade-or-business limb and the impact limb are joined by “and”, so both are required. The three routes inside the impact limb are joined by “or”, so one is enough.
Two adjustments hang off the gross receipts route. With respect to any employer for any calendar quarter, if that employer was not in existence as of the beginning of the same calendar quarter in calendar year 2019, that clause is applied by substituting “2020” for “2019”. And at the election of the employer, the test may be applied by substituting the immediately preceding calendar quarter for the quarter in question, and the corresponding calendar quarter in 2019 for the same calendar quarter in 2019 (26 U.S.C. 3134(c)(2)(A) and (c)(2)(B), 2024 edition).
Recovery startup business is itself a two-limb definition, and both limbs bind. It means any employer which began carrying on any trade or business after February 15, 2020, and for which the average annual gross receipts, determined under rules similar to the rules under section 448(c)(3), for the 3-taxable-year period ending with the taxable year preceding the quarter, does not exceed $1,000,000 (26 U.S.C. 3134(c)(5), 2024 edition).
Where the Claims Stand
The program is long past its wage periods and the claims are still moving. As of the week ending 8/1/2026, the IRS reported approximately 17,300 remaining ERC claims in various stages: under review (2,300), pending payment or disallowance (2,900), under audit (4,400), awaiting review of disallowance responses (6,100), and with the Independent Office of Appeals (1,600), and it says it updates that page monthly (IRS, Employee Retention Credit).
The IRS also says it is concerned about a large number of improper ERC claims, that anyone who incorrectly claims the credit has to pay it back and may owe penalties and interest, and it names the promoter behaviours to be wary of, including fees based on a percentage of the refund amount claimed (IRS, Employee Retention Credit).
The Other Two Credits the Phrase Gets Used For
Both are employer credits keyed to wages, and both work against income tax rather than employment tax, because each is determined for purposes of section 38, the general business credit.
The work opportunity credit. For purposes of section 38, the amount of the work opportunity credit determined under section 51 for the taxable year shall be equal to 40 percent of the qualified first-year wages for such year, and the qualified first-year wages taken into account for any individual shall not exceed $6,000 per year, with higher caps for certain qualified veterans (26 U.S.C. 51(a) and 51(b)(3), 2024 edition). It reaches only wages paid to members of ten named targeted groups, which the section lists (26 U.S.C. 51(d)(1), 2024 edition).
The employer credit for paid family and medical leave. For purposes of section 38, in the case of an eligible employer, the paid family and medical leave credit is an amount equal to the applicable percentage of the wages paid to qualifying employees during any period in which they are on family and medical leave, and applicable percentage means 12.5 percent, increased but not above 25 percent by 0.25 percentage points for each percentage point by which the rate of payment exceeds 50 percent (26 U.S.C. 45S(a), 2024 edition).
What a credit is in general, and how a credit differs from a deduction, are in tax credit.
Common Questions
A credit taken against employment taxes rather than against income tax. Section 3134 is the clearest example: it is allowed against applicable employment taxes, which the section defines by pointing at section 3111(b) (26 U.S.C. 3134(a) and (c)(1), 2024 edition). The work opportunity credit and the paid family and medical leave credit are not employment tax credits in that sense, because each is determined for purposes of section 38, the general business credit (26 U.S.C. 51(a), 2024 edition; 26 U.S.C. 45S(a)(1), 2024 edition).
Employers and tax-exempt organizations that had employees and met one of three tests for the quarter, government-ordered suspension, the required decline in gross receipts, or recovery startup status, with the exact requirements differing by period (IRS, Employee Retention Credit). The credit was never available to individuals.
Section 51 carries its own termination rule and the date in it moves whenever Congress acts, so the section’s current text is the only reliable answer. In the 2024 edition of the Code that rule reads: the term wages shall not include any amount paid or incurred to an individual who begins work for the employer after December 31, 2025 (26 U.S.C. 51(c)(4), 2024 edition).
Because they were enacted in pieces. The IRS puts it plainly: the requirements are different depending on the time period for which the credit is claimed (IRS, Employee Retention Credit). Section 3134 is only the last piece, and it applies only to wages paid after June 30, 2021, and before October 1, 2021, with the recovery startup carve-out running to January 1, 2022 (26 U.S.C. 3134(n), 2024 edition).
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