Can You Get the ERC Credit for 1099 Employees?

July 7, 2023
Dayes Law Firm

Did you keep your business open and retain employees on payroll during the pandemic, even though government regulations restricted your operations? As an eligible employer, you may be able to claim the Employee Retention Credit (ERC), a refundable tax credit of up to $26,000 combined per employee.

What about independent contractors? Can you claim the ERC credit for 1099 employees?

Independent Contractor Wages Are Ineligible for the ERC

For ERC purposes, “qualified wages” only cover what you pay your payroll employees. This includes wages that go on payroll taxes and other qualifying benefits like health plans and paid vacation.

Payments you issue to 1099 employees, like freelancers and independent contractors, don’t count as qualified wages for which you can claim the ERC benefit. 

Other Wages That May Not Qualify for the ERC Benefit

Other wages may be ineligible for the ERC tax break besides independent contractor wages. One common example is majority shareholder wages. If you’re an employee in a business of which you own more than 50%, your salary most likely won’t count toward an ERC claim. Similarly, you probably won’t be able to claim the ERC for employees who are your close family members.

Potential Consequences of Claiming Tax Credits on Ineligible Wages

The Employee Retention Credit has helped many businesses stay afloat during and after the pandemic, but this unique tax break also resulted in a lot of confusion. Moreover, the IRS has caught some disreputable employers abusing this tax break. Because of this, the IRS is cracking down on inappropriate ERC claims and warns employers against claiming this tax credit if they might now qualify.

Any mistake or discrepancy in your claim could raise a red flag and trigger an IRS audit, with potentially serious consequences for your business. If the IRS audits your claim and discovers you attempted to collect the ERC credit for 1099 employees (even if you acted in good faith), your business could face costly penalties. Furthermore, the audit could include your overall tax practices, not only the ERC claim.

Consult a Reputable Tax Professional Before Claiming the ERC Benefit

Consulting a competent tax professional can help avoid frustration, mistakes, delays, and stressful IRS audits resulting from incorrect ERC claims. Beware of shady tax services that promise unrealistic returns, and work with an experienced, reputable tax lawyer to ensure you follow all IRS guidelines in your claim. 

Your tax attorney can:

  • Let you know which wages are eligible for the ERC tax benefit
  • Ensure all your tax documentation aligns
  • Help you provide clear, accurate information on Form 941-X 
  • Recommend best practices for avoiding an IRS audit
  • Help you present solid supporting documentation if the IRS ends up auditing your claim

Remember, the window for claiming the ERC tax break is shrinking fast. The deadlines for ERC claims for 2020 and 2021 are April 15, 2024, and April 15, 2025, respectively. If you haven’t started the claim process, now would be the right time. 

Contact Dayes Law Firm for Trusted Legal Guidance With Your ERC Claim 

Do you have more questions about the ERC tax benefit besides its applicability to 1099 employees? Are you preparing to file for the ERC and need to determine whether your claim complies with all IRS rules? The experienced tax attorneys of Dayes Law Firm can help you calculate your potential ERC and file your claim within the deadlines. 

Call 800-503-2000 for a free consultation with an Arizona tax lawyer today.