ERC Subcontracting Costs – What You Need to Know
The ERC (Employee Retention Credit) is a tax credit that was introduced as part of the CARES Act in 2020. It was designed to encourage employers to retain their employees during the COVID-19 crisis. The credit can be worth up to $5,000 per employee, depending on their wages and the length of time they are kept on payroll.
One of the requirements for claiming the ERC is to show a significant decline in gross receipts. This decline can be calculated using the same method as for the PPP (Paycheck Protection Program) loans. If your business has experienced a decline in revenue of at least 50% compared to the same quarter in the previous year, you may be eligible for the ERC.
Many businesses are not aware that they can claim the ERC for subcontractor costs as well. This can be a significant benefit, especially for small businesses that rely on subcontractors to carry out some of their work. However, there are some things to keep in mind when claiming the ERC for subcontractor costs.
Firstly, the subcontractor must be an eligible entity. This means they must be an independent contractor, sole proprietor, partnership, or LLC. They must also have less than 500 employees and have experienced a significant decline in gross receipts due to the COVID-19 crisis.
Secondly, the subcontractor costs must be incurred between March 13, 2020, and December 31, 2021. This means that any payments made to subcontractors before or after these dates cannot be claimed for the ERC.
Thirdly, there are some limitations on the amount that can be claimed for subcontractor costs. The total amount of the credit cannot exceed the employer’s share of Social Security taxes for the quarter in which the credit is claimed. This means that if the employer’s share of Social Security taxes for the quarter is $10,000, the credit for subcontractor costs cannot be more than $10,000.
Finally, it is important to keep accurate records of all subcontractor costs and payments. This includes invoices, contracts, and receipts. Having clear and detailed records will make it easier to claim the ERC and avoid any potential issues with the IRS.
In summary, the ERC can be a valuable tax credit for businesses that have experienced a decline in revenue due to the COVID-19 crisis. Claiming the credit for subcontractor costs can be a significant benefit, but it is important to ensure that the subcontractors are eligible entities and that accurate records are kept. If you are unsure about your eligibility for the ERC or how to claim it for subcontractor costs, it is best to consult with a tax professional.