Can a Sole Proprietor Claim the Employee Retention Credit?

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If you’re one of the 23 million sole proprietorships in the U.S., you’re part of the country’s most popular form of business entity.

Because sole proprietors wear so many hats, many haven’t heard of the Employee Retention Credit (ERC). Of those that have, the majority have questions concerning their eligibility and ask us, “Can a sole proprietor claim the employee retention credit?”

The answer is not a simple “Yes” or “No.” We’ll answer this question for you, but for those sole proprietors not yet familiar with the ERC, let’s briefly touch on its highlights.

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Fast Facts About the ERC Program

The federal government established the ERC program to help businesses that were able to retain their employees during the COVID-19 pandemic. If your business is eligible, you will receive a tax credit, not a loan. It does NOT have to be paid back.

The employee retention credit is based on qualified wages and healthcare paid to employees.

  • Pays you up to $26,000 per employee
  • Available from March 12, 2020, through September 30, 2021
  • Your business qualifies with decreased revenue or COVID event
  • There is no limit on funding

Can a Sole Proprietor Claim the ERC?

According to the IRS, self-employed individuals are not eligible for the ERC concerning their self-employment earnings.

However, a self-employed individual who employs individuals in their trade or business and meets the eligibility requirements may be eligible for the ERC concerning qualified wages paid to the employees.

For example, John is a plumber operating as a sole proprietor. He has two W-2 employees, Sue and Fred. If eligible, John can file for the ERC concerning Sue and Fred’s qualified wages, but not his own earnings.

Can a Sole Proprietor Claim the Employee Retention Credit if They Received a PPP Loan?

Initially, a sole proprietor or another type of business entity that received a PPP loan was not eligible for the employee retention credit. However, the Consolidated Appropriations Act of 2021 enables a business that received a PPP loan to also apply for the ERC retroactively back to 2020.

There is one caveat. The business can’t use the wages that qualify it for PPP loan forgiveness to determine its ERC amount. Documentation must be provided that proves the business isn’t using both programs to cover the same wages.

For example, if you used your PPP loan to pay $40,000 in wages and you expect to qualify for PPP forgiveness, you can’t use those same funds to cover the same $40,000 in wages.

A sole proprietor who received a PPP loan can still file for the ERC. And, even if you receive the employee retention credit, you are still eligible for PPP loan forgiveness if you file the application for forgiveness and can show you used the proceeds to cover rent, utilities, payroll costs, and other qualifying expenses.

Applying for the ERC

Many self-employed individuals who retained paid employees in 2020 and the first three quarters of 2021 have needed some help applying for the ERC.

Since they file an individual tax return annually (Form 1040), they have mistakenly entered the tax credit they’re due under Work Opportunity Credits. Unfortunately, this will not only delay their individual tax refund, it will also delay the process of receiving their ERC.

The correct form for applying for the employee retention credit is Form 941-X. You will need to file this form if you have previously filed Form 941 for the quarters you’re applying for the credit.

There are only two deadlines for filing for the ERC. For all quarters in 2020, you have until April 15, 2024. For the first three quarters in 2021, the deadline is April 15, 2025.

If you qualify as a Recovery Startup Business (started operations after February 15, 2020), you can also file an ERC request for the fourth quarter of 2021.

Questions Concerning Eligibility and Applying?

Bottom Line Concepts has helped over 19,000 businesses recover over $3.2 billion in credits. In many cases, our clients had CPAs who did not have expertise with the ERC and used us to determine eligibility all the way through claiming and receiving funds.

Find out today if you qualify by scheduling your no-cost, no-obligation ERC intro call.

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