How to Ensure Accurate ERTC Reporting with Subcontractors

November 17, 2023
Dayes Law Firm

Taking advantage of tax credits is a business-savvy move, and the Employee Retention Tax Credit (ERTC) is a good opportunity for businesses recovering from the impact of COVID-19. 

This credit allows employers to recover qualified wages they paid in 2020 and 2021. However, qualifications become confusing when considering ERTC subcontractor reporting.

What Is the ERTC? 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced the Employee Retention Credit (ERC), a.k.a. the Employee Retention Tax Credit (ERTC), in 2020. At first, employers who already collected Payment Protection Program (PPP) loans could not claim the ERTC. In 2021, the Consolidated Appropriations Act amended this, making the credit accessible to more businesses.

With the ERTC, eligible employers can claim 50% of qualified employee wages up to $10,000 per employee for 2020 and up to 70% of the same for 2021.

To qualify for the ERTC, you must have either 1) experienced a partial shutdown due to government orders or 2) seen a significant decline in gross receipts due to the COVID-19 pandemic. You can claim the ERTC by filing an amended Form 941.

Subcontractor Wages and Taxes

When you run a business, there are many parties involved. In addition to salaried employees, you may outsource work to independent contractors and subcontractors. Independent contractors are employees you have a contract with directly, while subcontractors work under those contractors to perform tasks unique to their skillset.

When you pay anyone who isn’t a payroll employee, like subcontractors, they must file a Form 1099-NEC if they collect more than $600. They are responsible for their own tax records, and you are not responsible for withholding their taxes. Instead, they will pay a self-employment tax.

Reporting the ERTC When Dealing With Subcontractors 

When claiming the ERTC, you can only claim the qualified wages of payroll employees. Since subcontractors are not on your payroll, you cannot claim their wages for the ERTC. Therefore, ERTC subcontractor reporting would not assist with claiming ERTC funds.

For qualified employees, you may claim the ERTC credit using Form 941-X, which you use to amend your payroll taxes from the tax year your business qualifies for the ERTC. Then, you can report the ERTC refund on Form 1120S, line 13g. You must also account for the credit on Form 5884.

Defining Qualified Wages

If you can’t claim subcontractor wages on the ERTC, what wages can you claim? 

This depends on the size of your business. The Internal Revenue Service (IRS) defines a small business as having 100 or fewer employees in 2020 or 500 or fewer in 2021. Such businesses may claim 50% of all payroll employee wages, up to $10,000 per employee. This also includes qualifying healthcare benefits. 

However, if you don’t meet the requirements for a small business, you can only claim the wages of employees unable to work due to COVID-19. Further, you must have paid wages between March 13, 2020, and June 30, 2021. 

Ensure Accurate Reporting for the ERTC

If you report the ERTC inaccurately, you could face fines, audits, and interest charges. To avoid this, don’t rush the filing process. You should always: 

  • Keep accurate records of your payroll and taxes
  • Conduct an internal compliance check
  • Organize records for readily available access
  • When in doubt, consult a legal professional 

Contact Experienced ERTC Attorneys To Ensure Accurate Reporting

ERTC subcontractor reporting shouldn’t be a problem, but you may run into other issues while filing for the ERTC.

At Dayes Law Firm, our ERTC recovery team has helped hundreds of businesses claim the ERTC. We can help you file for the credit and ensure the accuracy of your report. Don’t risk noncompliance; call 866-567-4510 today for a free consultation