The calculation is based on the employment tax overpayment interest rate calculation methodology published by the IRS, which starts from the date that the tax would have been due and ends on the date the IRS processes payment to the taxpayer. Interest compounds daily with an annualized quarterly interest rate that is published by the IRS in advance of each calendar quarter.
The IRS pays different interest rates depending on the type of entity that paid the employment tax. Corporate entities include C-Corporations or S-Corporations. Non-Corporate includes partnerships, LLC's, Sole-Proprietorships and Non-Profit Entities (501(c)3 entities are not considered "Corporate" taxpayers for IRS employment tax overpayment interest rate purposes). The IRS pays less interest to "Corporate" entities. The rate is calculated as the fed funds rate rounded to the nearest whole number, plus 3% for non-corporate entities. For Corporate entities, the rate is 1% less than the Non-Corporate rate for the first $10,000 in refunded tax, and 2.5% less than the Non-Corporate rate for any amount in excess of $10,000 for that quarter.
The estimated processing time for ERC refunds has fluctuated since the ERC was introduced in 2020. Processing times have varied from three months for small claims to several years for larger claims. In September 2023, the IRS announced a "moratorium" on processing refund claims. The IRS will continue to accrue interest on these claims until they process payment.
These amounts are required to be paid by the IRS based on the Internal Revenue Code.