2021 Employee Retention Credit for Sole Proprietor with one W-2 employee

[jkoerber]

I am a sole proprietor business with one W-2 Employee.  I was able to maintain my employee throughout 2020 and 2021.  In my research of the ERC, it looks like I can qualify for the credit since my Q1 & Q2 2021 gross income were more than 20% less than my 2019 income.

If that is the case, and the employee made $28,260 in those first two quarters of 2021, I believe I can get $14,000 in credit. Is that right? 

Last, where on earth do I enter this in my TurboTax 2021 Home & Business desktop software.  I've searched all of these postings, and I am at a loss.

[GeorgeM777]

Yes.  The Consolidated Appropriations Act, 2021, extended the end date of the credit period to July 1, 2021. It also changed the credit to be available once per quarter in 2021. The calculation method changed to include 70% of wages up to $10,000 per employee per eligible quarter in 2021. This extension and increase of the wage percentage increases the potential credit per employee up to $14,000 in 2021 in addition to the $5,000 from 2020.

@jkoerber

[Edited 03/18/2022 | 7:35 am PST]

[jkoerber]

GeorgeM777,

Thanks for the response.  I gave that a try, but it does not seem to be the right spot in my opinion due to the wide range of calculations it comes up with.  Prior to any changes, my taxes stand at a refund of $2,947 for Fed and $605 refund for California state.  

When I enter the $14,000 credit for our employee in the first section (Work Opportunity Credits), it ended up changing the Fed to an amount of $1,416 owed and CA state refund going up to $939?  That's weird - I should be getting a discount not more taxes!

I tried it in the second section and it changed the Fed taxes to a slightly smaller refund of $2,097 and CA state to a much higher refund of $1,724, strange.

Should the value be a negative?  If I enter $-14,000 in the first section the Fed refund ends up increasing to $7,435 and state refund decreases to $271.  If I enter the same negative 14K into the second section I get the same $7,435 for federal but state goes up to $2,875.

That last one seems the best, but I really am more confused now than before due to 4 different calculations depending on which section and whether its positive or negative value!

[GeorgeM777]

As a follow-up to the prior response, the ERC does not get reported anywhere on your income tax return.  Thus, your thoughts were correct in that the ERC does not get reported in the section where a taxpayer can enter work opportunity credits or general work credits.

The ERC is reported on Form 941, which TurboTax does not support.  You will need to download such form from the IRS website.  If you have already filed Form 941, then download an amended form, Form 941-X.

Corrections to amounts reported on Form 941, lines 11c, 13d, 21, and 22, for the employee retention credit are reported on Form 941-X, lines 18a, 26a, 30, and 31a, respectively.  However, how you figure the employee retention credit for qualified wages paid after March 12, 2020, and before July 1, 2021, is different from how you figure the credit for qualified wages paid after June 30, 2021, and before January 1, 2022.  Also, for corrections to qualified wages paid after June 30, 2021, you may need to complete new line 31b to tell the IRS if you're eligible for the employee retention credit solely because your business is a recovery startup business.

Now, there is the possibility that after you receive the credit (assuming you are eligible) you may need to report such credit on your tax return.  In this regard, because you are applying for the credit much later than the time period it occurred and/or you may receive back more funds than your business had due for payroll taxes -- so the business could get cash back as opposed to just owing less in payroll taxes-- that is then reported as a reduction in payroll tax expenses on your business income tax return.  

Here is a link to the IRS publication for Form 941-X which you might find helpful.

Instructions for Form 941-X

@jkoerber 

[jkoerber]

GeorgeM777,

Thanks again for the thoughtful comments.  The 941-X is definitely the way to go, and I found an excellent tax video on how to complete the forms here: https://youtu.be/Qm2WCp3szB0

So I now have my two 941-X forms complete for Q1 and Q2 2021.  They each represent the $7,000 max per quarter for a total of $14,000.

Since I am claiming the ERTC for wages and taxes already paid and filed in 2021, I have to file these 941-X forms to claim the credit, and "reduce deductible wage expenses" on my 2021 taxes.  That wage reduction is what I have been reading about but can't figure out how to handle it and where to enter it in TT?  Ultimately this should affect line 26 on the Sched C.  On the EMPLOYEE WAGES AND WORK CREDITS  the only place it makes sense would be to enter it as -$14,000 right under the W-3 wages entry at the top?  THis would change line 26 from $2,650 (from my W-3 box 1) to showing $0.  Does that makes sense, or am I barking up the wrong tree with where to put that $14K in my 2021 taxes?

[JulieS · Accepted solution]

Not exactly. You are correct that you need to enter the amount on line 26, but it is entered as a positive number in the field Enter any other work credits you claimed (in Desktop it is called  Work Credits). The program will reduce your wage deduction by the amount of the credit.

[jkoerber]

GeorgeM777,

Roger that! That's ultimately what I did.  I had to enter the amount in the second section of work credits as $2,650 (not the full $14,000) because TT gave me an error saying that work opportunity and other work credits could not exceed the total wages.  I guess that makes sense since either way, the net result is that line 26 ends up being $0 for me.

And just for background the wages of $2,650, the employee made $26,000 in voluntary deductions for her 401(k) which is why that wage amount appears low.

[changbel]

Hi, I like your response very much.  Our business got the ERC credit from the payroll company.  They filled out the 941 or 941X and deducted our next quarter's payroll taxes based on last quarter's ERC credit.  In that case, on Sch. C of 2021, we reported less payroll taxes.  Hence, we do NOT need to report this ERC anywhere else on Turbo as an additional income or work credit, because the credit was already included in the reduction in payroll tax expenses on our business income tax return.  Am I right?   Thanks!

Changli

[ZoltanB45]

If you reduced the payroll expense on your tax return by the credit given to you, then yes, there are no further entries to be made. One of the major items, the IRS audits is payroll. As long as the amount listed on your return matches the numbers in your payroll reports, you are fine.