In the wake of the coronavirus pandemic, the Department of the Treasury and the Internal Revenue Service (IRS) established the Employee Retention Credit (ERC) under the Coronavirus Aid, Relief and Economic Security Act (CARES). This credit is a refundable tax credit against various payroll taxes equivalent to 50% of the qualifying wages that an eligible employer pays to its employees. But are self-employed individuals eligible for this credit?The answer is no. Self-employed individuals are not eligible for the employee retention credit with respect to their own self-employment income.
However, a self-employed person who employs people in their trade or business and who otherwise meets the requirements to be an eligible employer may be eligible to receive the employee retention credit with respect to qualified wages paid to employees.Government employers and people who are self-employed are not eligible for the ERC. Domestic employers are also not considered to operate a trade or business and are therefore not eligible for the employee retention credit with respect to their domestic employees. Organizations described in section 501(c) of the Internal Revenue Code (the “Code”) and exempt from taxes under section 501(a) of the Code may be eligible employers for the purposes of the employee retention credit if they are employers who otherwise qualify for the credit.For purposes of determining eligibility for the employee retention credit, all employers, including tribal governments and tribal entities, must apply the aggregation rules of sections 52(a) and (b) of the Code and sections 414(m) and (o) of the Code. For solely for the purposes of the employee retention credit, a tribal government is considered to carry out commercial or commercial activities, and all activities carried out by the tribal government will be considered part of those commercial or commercial activities.Employees are not counted for this credit if the eligible employer is allowed a work opportunity tax credit for the employee.
Wages that qualify for this credit do not include the wages for which the employer received a family leave and paid sick leave tax credit under the Families First Coronavirus Response Act. Employers cannot calculate an employee retention credit based on salaries they have previously used to receive a PPP loan.Any tribal government or tribal entity that carries out a trade or business may be an eligible employer for the purposes of the employee retention credit, if it otherwise meets the credit requirements. While an LLC offers some tax benefits for homeowners, this is a significant drawback with respect to the employee retention credit.The federal government, governments of any state subdivision or state policy, and any agency or agency of those governments are not eligible employers and are not entitled to receive the employee retention credit.In conclusion, self-employed individuals are not eligible for this credit with respect to their own self-employment income. However, they can apply for it with respect to qualified wages paid to their employees if they meet all other requirements.