The ERC Tax Credit for 1099 Employees

The Employee Retention Tax Credit (ERTC) has provided substantial benefits for companies retaining employees during the COVID-19 pandemic. While originally only for W-2 employees, eligibility expanded to include 1099 workers in certain situations. Understanding the opportunities and limitations can help businesses maximize potential credits.

Overview of the ERC for 1099 Workers

The ERTC provides a credit of up to $7,000 per employee per quarter in 2021 for qualified wages and health expenses. When originally launched, it was only allowed for W-2 employees.

However, the 2021 expansion of the program allowed the inclusion of 1099 workers if they were considered “statutory employees” per IRS categories. This opened the door for some 1099 filers to qualify.

Which 1099 Workers Qualify as Statutory Employees?

The IRS has strict definitions for who can be classified as a statutory employee. In general, the categories include:

  • Certain full-time life insurance salespeople
  • Certain homeworkers (work from their own home)
  • Certain full-time traveling salespeople
  • Certain agents or commission drivers

Workers must meet the IRS tests for full-time status and type of work performed. Independent contractors and gig workers would generally not be considered statutory employees eligible for the ERTC.

Claiming the ERC for Qualified 1099 Workers

For 1099 workers who meet the statutory employee designations, the process for claiming the ERC includes:

  • Verifying the worker meets the full-time status tests
  • Tracking qualified wages and health expenses by quarter
  • Including eligible 1099 workers on Form 941 tax returns
  • Reporting 1099 wages separately from W-2 wages

The credit is claimed against the employer portion of Social Security taxes on 1099 wages, similar to W-2 wages. Any excess is refundable.

Key Limitations on 1099 ERC Claims

While the ERC was expanded to cover certain 1099 workers, some key limitations exist:

  • Must meet strict statutory employee definitions. Independent contractors won’t qualify.
  • 1099 recipients may not claim the credit themselves on 1040 returns.
  • Taxable income caps still apply, limiting credits for high 1099 wage earners.
  • Complex affiliation rules may limit credits for related businesses.
  • Requires filing Form 941 payroll tax returns even when not otherwise required.

Conclusion

The inclusion of some 1099 statutory employees for the ERC expanded the credit reach. However, the limitations still prevent most independent contractors from being eligible. Consult a tax professional to assess whether your 1099 workers qualify within the strict confines of the updated guidance.

Maximizing 1099 ERC Opportunities

For employers with 1099 workers who meet the statutory employee definitions, some steps can be taken to maximize ERC opportunities:

  • Review 1099 roles to identify those that may qualify, such as full-time traveling salespeople on commission.
  • Track 1099 statutory employee wages separately from other 1099 contractor payments.
  • Compile supporting records on hours worked and wages paid to qualify 1099 workers.
  • Calculate health insurance costs for eligible 1099 employees who participate in company health plans.
  • File Form 941 payroll returns even if not otherwise required to claim ERC credits.
  • Claim credits retroactively on amended returns before deadlines expire.
  • Consider the timing of 1099 payments to optimize credit amounts within taxable wage caps.
  • Confirm no conflict with any PPP loan forgiveness claimed. ERC and PPP cannot overlap.

With some strategic planning and preparation, companies may find meaningful ERC opportunities for their statutory 1099 workforce. But act quickly – amendment deadlines for prior quarters can limit recapture options.

Risks and Considerations

Pursuing ERC tax credits for 1099 workers has some risks and considerations:

  • It may increase the likelihood of IRS audits to ensure qualification. Maintain thorough support.
  • If 1099 workers are reclassified as employees, prior ERC claims could be denied.
  • Companies without W-2 employees may overlook this option since they don’t file Form 941.
  • Complex affiliated service group rules could restrict credits for related companies.
  • Requires making quarterly federal tax deposits and filings which otherwise may not apply.

As with claiming any tax credit, proper due diligence is key to ensure compliance and support credit amounts in case of an audit. The ERC for 1099 employees provides benefits but also some administrative responsibilities.

Frequently Asked Questions

Which 1099 workers qualify for the ERC?

Only certain statutory employees like full-time traveling salespeople meet the criteria. Independent contractors do not qualify.

Can I claim the ERC as a 1099 worker?

No, only the employer can claim the ERC on eligible 1099 statutory employees based on wages paid.

What records should I keep for 1099 ERC credits?

Documentation of hours worked, wages paid, and health insurance costs by quarter are necessary to support the 1099 ERC credits claimed.

Are the wage limits the same for 1099 workers?

Yes, the taxable wage cap per employee per quarter applies to both W-2 and eligible 1099 statutory employees.

How is the credit claimed for 1099 workers?

The employer claims the ERC on Form 941 payroll tax returns, reporting 1099 wages separately from W-2 wages.

Can I claim the ERC retroactively?

Yes, amended returns can be filed to claim credits on prior period eligible 1099 wages, if within the statute of limitations.

Do I have to file Form 941 to claim the credit?

Yes, even if you have no W-2 employees, filing Form 941 is required to claim ERC credits on 1099 statutory employees.

Can a 1099 worker also get a PPP loan?

No, double dipping is prohibited. Wages used to claim ERC credits cannot also be used to qualify for PPP loan forgiveness.

Are there risks in claiming ERC for 1099 workers?

Yes, it may increase audit risk and require proper documentation to prove eligible 1099 statutory employee status.

When do I need to claim prior quarter credits?

Each quarter has time limits on amending returns to claim additional credits for that quarter. Act quickly before opportunities expire.

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