The employee retention credit (ERC), once a valuable incentive for businesses that kept employees on payroll during the COVID-19 pandemic, has entered a new and more restrictive phase. With recent legislative changes under the One Big Beautiful Bill Act (OBBBA), employers must reevaluate their eligibility and documentation to avoid harsh penalties and disallowed claims.

What is the ERC?

Originally introduced under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the ERC offered a refundable payroll tax credit to eligible employers who retained employees during pandemic-related disruptions. It applied to wages paid after March 12, 2020, and before Oct. 1, 2021, with enhanced benefits for recovery startup businesses through Dec. 31, 2021. The credit’s scope and eligibility have changed several times since then, causing some confusion and, unfortunately, exploitation.

Key ERC changes under OBBBA

According to the IRS, more than 3.5 million ERC claims have been filed, many of which are still being audited. Recent legislative changes, like those made under the OBBBA aim to tighten control and close avenues for abuse.

1. Disallowance of New ERC claims after January 31, 2024

Under OBBBA, any ERC claims filed after Jan. 31, 2024, are disallowed, even if it would have been valid under previous statute of limitations rules. This retroactive cutoff directly responds to widespread questionable filings and places a hard stop on new refund requests.

This means employers that missed the deadline can no longer claim the credit, even for legitimate reasons. It’s a sharp deviation from standard tax practice and a sign of how seriously Congress is treating ERC enforcement.

2. Extended statute of limitations

For claims related to wages paid in Q3 and Q4 of 2021, the statute of limitations has been extended from three years to six years, now expiring on April 15, 2028. This extension gives the IRS a longer window to audit and assess existing claims. Businesses that already filed should retain records and documentation through that date, especially if their claim involves the second half of 2021. Employers should retain all supporting documentation for these claims through at least April 15, 2028, to be prepared for potential IRS examinations.

3. Increased penalties for improper claims

The OBBBA introduces a new $1,000 per-failure civil penalty on “covid-era promoters” and taxpayers who file improper ERC claims. An additional 20% penalty will be assessed on excessive refund claims as well. The IRS wants to ensure claims were made based on accurate eligibility standards, inflated revenue loss calculations, or mischaracterized shutdowns.

The penalties for inaccurate or fraudulent claims could include repayment of the credit, interest, and additional fines. Employers are encouraged to review claims already filed to ensure full compliance with IRS guidance.

Who should still be concerned?

Although the credit can no longer be claimed, employers who already filed, or plan to defend claims during an audit, must stay informed. Here’s what businesses should focus on:

• Documentation: Maintain records supporting ERC eligibility, such as comparisons of gross receipts and governmental orders that impacted operations.
• Audit preparedness: Be ready for scrutiny, especially for high-dollar claims or those filed close to the Jan. 31, 2024, deadline.
• Promoter due diligence: Businesses that relied on third-party firms to calculate or submit ERC claims should verify that those filings followed IRS rules. The IRS continues to publish warnings about aggressive ERC mills.

IRS initiatives and guidance

In fall 2023, the IRS launched an ERC moratorium on processing new claims and introduced an ERC withdrawal program for employers who filed questionable claims. The agency also offers a voluntary disclosure program for taxpayers seeking to correct prior filings and repay improper credits. These initiatives, paired with OBBBA’s enforcement tools, aim to clean up the ERC backlog and restore confidence in tax compliance.

What employers need to know

The employee retention credit was a lifeline for many businesses during the pandemic, but its legacy is now intertwined with compliance risk and aggressive enforcement. Employers should:

• Confirm that any previously filed ERC claim was based on solid documentation and correct eligibility
• Consult with a qualified tax professional, not a promoter, if questions arise about existing claims
• Preserve records through April 15, 2028, for Q3 and Q4 2021 wages

While the ERC program may be closed to new applicants, its aftereffects will continue to impact employers for years. Staying informed and in compliance is the best strategy to navigate the evolving ERC landscape.

Question: Jan and Mark Hall, a married couple living in Michigan with no dependents, filed jointly in 2025. One spouse received advance premium tax credits (APTC) through the Health Insurance Marketplace, and neither was enrolled in employer-provided coverage. Their modified adjusted gross income (MAGI) for 2025 was $150,000, and they paid $14,500 in health insurance premiums by year-end. If all circumstances remain the same in 2026, will they continue to qualify for premium tax credit (PTC) subsidies?

Answer: No. Starting in 2026, Jan and Mark will no longer be eligible for the PTC subsidies.
Under current law, effective through tax year 2025, taxpayers are allowed to receive subsidies if premiums exceed 8.5% of total income. The historical standard for eligibility was that income must exceed 400% of the federal poverty level (FPL), which is a much lower threshold.

The impact of the change can be seen in this calculation:

The Hall’s 2025 MAGI of $150,000 falls below the 8.5% existing standard.
($150,000 x 8.5% = $12,750)

Because their premiums of $14,500 exceeded $12,750, they were
eligible for the PTC.

The income-based exception beginning Jan. 1, 2026, enacted by the American Rescue Plan Act, no longer applies. Taxpayers with MAGI above 400% of the FPL will no longer be eligible for subsidies, regardless of their premium burden.

Using 2025 values for 2026 illustration:

The 2025 FPL for a household of two in Michigan is $19,720

400% of FPL income cap: $19,720 x 400% = $78,880

Jan and Mark’s income of $150,000 exceeds the restored income cap. They are ineligible for the PTC in 2026.

The tax landscape is shifting again, and this time, it’s courtesy of the One Big Beautiful Bill Act (OBBBA). OBBBA is a sweeping piece of legislation that brings long-overdue updates to the rules governing Form 1099-NEC and Form 1099-MISC. It raises the reporting threshold for Form 1099-MISC and Form 1099-NEC from $600 to $2,000, effective for payments made after Dec. 31, 2025.

Major tax law changes

Historically, businesses were required to file Form 1099-MISC and Form 1099-NEC for payments of $600 or more to service providers, freelancers, landlords and other non-employees. This threshold had not changed for decades and was not indexed for inflation, resulting in an ever-increasing compliance burden as nominal payment amounts rose.

Starting with payments made after Dec. 31, 2025, the OBBBA raises the reporting threshold from $600 to $2,000. This means that businesses will only need to issue Forms 1099-MISC or 1099-NEC if aggregate payments to a payee in a calendar year exceed $2,000. Beginning in 2027, the new law also introduces an annual inflation adjustment for the threshold, ensuring that the reporting requirement keeps pace with economic realities.

Provisions for tax preparers

• Increased reporting threshold: The $2,000 threshold applies to all payments reportable under §6041(a), including non-employee compensation and other payments typically reported on Forms 1099-MISC and 1099-NEC.
• Inflation adjustment: The threshold will be indexed for inflation annually, using 2025 as the base year. Adjustments will be rounded to the nearest $100.
• Remuneration for services: The new threshold also applies to payments for services under §6041A(a)(2), affecting independent contractors and similar arrangements.
• Backup withholding: The definition of “reportable payment” for backup withholding under §3406(b)(6) is updated to reference the new, inflation-adjusted threshold.
• Conforming amendments: The law updates terminology to refer to “calendar year” instead of “taxable year” and changes the heading of §6041(a) to “exceeding threshold.”

Tax preparer guide to the OBBBA

As a tax professional, you should take the following steps to prepare for the new law:

• Update client communication: Inform clients about the new $2,000 reporting threshold and the impact on their Form 1099 filing obligations. Many small businesses and sole proprietors will see a reduction in the number of forms they need to file.
  Tip: NATP members have access to a series of client newsletters to download and share.
• Review vendor payment processes: Encourage clients to review their vendor and contractor payment records to ensure compliance with the new threshold. Payments below $2,000 in a calendar year will no longer trigger a 1099 filing requirement.
• Adjust backup withholding procedures: Update internal procedures to apply backup withholding only when payments exceed the new threshold.
• Monitor inflation adjustments: Stay current on annual inflation adjustments to the threshold, as these will affect reporting requirements in future years.
• Update software and systems: Ensure that accounting and tax preparation software is updated to reflect the new thresholds and reporting rules.

Comparison of old vs. new rules

Before OBBBA, H.R.1 (pre-2026)

Businesses had to file Form 1099-NEC or Form 1099-MISC for any service provider who paid $600 or more in a year.

• The $600 threshold was not adjusted for inflation and had been unchanged for decades.
• Small payments to freelancers, landlords and contractors often triggered reporting requirements, increasing compliance burdens.
• Backup withholding applied at the same $600 level if payees failed to provide correct TINs.

Example of the old rule:

If eBay paid Viana, who is a freelance graphic designer, $800 a year for selling products, it had to issue Form 1099-NEC to her.

After OBBBA, H.R.1 (starting 2026)

• The threshold rises to $2,000 for a calendar year.
• Inflation adjustments ensure the threshold remains relevant over time.
• Fewer small payments will require reporting, reducing paperwork, and filing costs.
• Backup withholding thresholds now align with the higher reporting thresholds.

Example of the new rule:

If eBay paid Viana, who is a freelance graphic designer, $800 in a calendar year, then eBay will not be issuing Viana Form 1099-NEC, since it’s below the new $2,000 threshold.

Provision	Prior law (pre-OBBBA)	OBBBA ( §70433) changes
Reporting threshold	$600	$2,000 (indexed for inflation)
Inflation adjustment	None	Yes, for years after 2026
Remuneration for services	$600 threshold	New threshold applies
Backup withholding	$600 threshold	New threshold applies
Effective date	N/A	Payments after Dec. 31, 2025

Preparing for the new Form 1099 landscape

The One Big Beautiful Bill Act represents tax simplification reporting for businesses and tax professionals. By raising the reporting threshold and indexing it for inflation, the law reduces compliance burdens and aligns reporting requirements with current economic conditions. Tax professionals should take this opportunity to update their practices, educate clients and implement efficient tax planning strategies.

Stay informed, stay proactive and help your clients navigate the new landscape with confidence.