The Employee Retention Credit (ERC) is a tax credit that was introduced in 2020 as a part of the CARES Act to encourage businesses to retain their employees during the pandemic. The credit was extended in 2021 to cover the first two quarters of the year. The ERC has proven to be a valuable lifeline for many small businesses struggling to stay afloat during these challenging times. However, there is still some confusion over whether self-employed individuals can qualify for the ERC. In this article, we will explore the rules and requirements for self-employed individuals to claim the Employee Retention Credit.
What is the Employee Retention Credit?
The Employee Retention Credit is a refundable tax credit that eligible employers can claim on their quarterly payroll tax returns. The credit is equal to 70% of qualified wages paid to eligible employees, up to a maximum of $7,000 per employee per quarter. Eligible employers can claim the credit for wages paid between March 12, 2020, and December 31, 2021.
Who is Eligible for the Employee Retention Credit?
Eligible employers include businesses, tax-exempt organizations, and government entities that were fully or partially suspended due to a government order related to COVID-19 or experienced a significant decline in gross receipts. Eligible employers can claim the credit for qualified wages paid to eligible employees during the period of suspension or decline in gross receipts.
Can Self-Employed qualify for the ERC?
The short answer is yes, self-employed individuals can qualify for the Employee Retention Credit. However, the rules and requirements for claiming the credit are different for self-employed individuals than for employers.
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Self-employed individuals can claim the credit on their 2020 or 2021 income tax returns if they meet the following criteria:
1. Trade or Business Suspension
The self-employed individual must have carried on a trade or business in 2020 or 2021 that was fully or partially suspended due to a government order related to COVID-19. The suspension must have occurred during any calendar quarter in 2020 or the first two quarters of 2021.
2. Significant Gross Receipts Decline
The self-employed individual must have experienced a significant decline in gross receipts in 2020 or 2021 compared to the same calendar quarter in 2019. The decline must be greater than 50% of the gross receipts for that quarter.
3. Eligible for the Credit
The self-employed individual must not have received a Paycheck Protection Program (PPP) loan or must have repaid the loan by the date the tax return is filed. The individual must also meet the definition of an eligible taxpayer under the CARES Act.
How to Claim the ERC for Self-Employed Individuals?
Self-employed individuals can claim the Employee Retention Credit on their 2020 or 2021 income tax returns using Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. The credit is claimed on Line 11 of the form and is equal to 70% of the qualified sick leave or family leave equivalent amount, up to a maximum of $7,000 per quarter.
Self-employed individuals should keep accurate records of their earnings and expenses to support their claim for the Employee Retention Credit. They should also consult with a tax professional or use tax preparation software to ensure they are claiming the credit correctly.
Self-employed individuals can qualify for the Employee Retention Credit if they meet the eligibility criteria outlined in this ERC FAQ article. The credit can be a valuable source of financial support for self-employed individuals who have been impacted by the COVID-19 pandemic.