How to Comply with the ERTC With Independent Contractors

November 12, 2023
Dayes Law Firm

Business owners around the United States felt collective relief when the government introduced the Employee Retention Credit (ERC) in 2020. The COVID-19 pandemic meant businesses were seeing significant drops in revenue, and the ERTC kept many organizations afloat.

However, some business owners don’t know how to navigate the ERTC and independent contractors. How do you comply with the ERTC guidelines while dealing with independent contractors?  

Since the ERTC is still a new tax credit and has already seen several revisions, some employers need help understanding how to file for the tax credit. The ERTC recovery team at Dayes Law Firm can help. 

What Is the ERTC? 

The Employee Retention Tax Credit is a COVID-19 relief measure the government introduced through the Coronavirus Aid, Relief, and Economic Security Act. Businesses suffered from declines in revenue, and some were laying off employees or shutting down altogether. 

The ERTC incentivized these employers to keep employees on their payroll by compensating them for a percentage of employee wages they paid during qualified quarters. In 2021, the Consolidated Appropriations Act revised the eligibility requirements from the CARES Act to include more businesses. It also extended the ERTC, allowing businesses to claim the ERTC through 2021. 

Wages and Taxes for Independent Contractors

While many employees are salary workers, sometimes employers look for outside help through independent contractors. Employers typically pay independent contractors on an hourly or gig basis. Many businesses also don’t provide benefits or paid time off for independent contractors. 

Independent contractors have unique tax requirements. As an employer, you’re not responsible for withholding taxes for independent contractors. Rather, they pay a self-employment tax and file Form 1099. 

However, there are exceptions. Suppose an independent contractor provides the incorrect taxpayer identification number on their tax return. The IRS may require you to withhold taxes from their future pay and deposit it to the IRS.

How Does the ERTC Apply to Independent Contractors?

Since you pay independent contractors differently than payroll employees, how do their wages impact your claim for the ERTC? According to the IRS, you may only claim payroll wages for the ERTC. This means that you, unfortunately, cannot claim the ERTC for wages you paid to independent contractors.

Various business types can claim the ERTC, including sole proprietorships, partnerships, S-corps, and more. To qualify for the ERTC, your business must have either experienced a suspension of operations due to a COVID-19-related government order or seen a significant decline in gross receipts. 

However, being a qualified employer doesn’t automatically mean all wages you pay are qualified wages. The issue of the ERTC and independent contractors is just one of the many complexities employers face. To ensure ERTC compliance, speak to an experienced tax attorney. 

Qualified Wages for the ERTC 

You might wonder: if independent contractors’ wages aren’t qualified wages, what wages are? 

The IRS describes qualified wages as those you (an eligible employer) pay to some or all of your employees, including qualified health plan expenses. Note that if you qualify as a small business (less than 100 employees in 2020 or less than 500 in 2021), you may claim up to 50% of employee wages up to $10,000 per employee for 2020 and up to 70% of the same for 2021.

If you are not a small business, you can only claim the employee retention credit for wages you paid employees who could not work during qualifying quarters.

At Dayes Law Firm, we can address any issues with the ERTC and independent contractors and any other compliance concerns you have. With our ERTC recovery team, you can rest assured you’re filing the ERTC correctly. Call 866-567-4510 for a free consultation