Self-employed individuals cannot claim the Employee Retention Credit on their own self-employment earnings, but a self-employed person who runs a business with W-2 employees may claim the credit on wages paid to those employees if the business meets the eligibility tests. The credit was built as an employer payroll tax incentive, not a benefit for individual earners, so whether you can claim it comes down to whether you paid W-2 wages during the eligible periods and to whom.
Why Your Own Earnings Don’t Qualify
The IRS states plainly that the Employee Retention Credit “is not available to individuals,” and it specifically lists “self-employed individuals who do not have any employees” as ineligible taxpayers.1IRS. Employee Retention Credit
The reason is in the definition of qualified wages. To count toward the ERC, wages must be subject to Social Security and Medicare taxes and reported on Form W-2. A sole proprietor’s net self-employment income on Schedule C or Schedule SE does not meet that definition. Neither do payments reported on Form 1099-NEC, the form used for independent contractors.2IRS. Frequently Asked Questions About the Employee Retention Credit
The practical result: a freelancer, gig worker, or sole proprietor with no employees has no path to the ERC, no matter how badly the pandemic hurt their income.
When a Self-Employed Business Owner With Employees Can Qualify
If your business paid W-2 wages to employees during 2020 or the first three quarters of 2021, you may claim the ERC on those wages if the business met one of these tests during the relevant quarter:2IRS. Frequently Asked Questions About the Employee Retention Credit
- A federal, state, or local government order fully or partially suspended your operations because of COVID-19. The order must have had a “more than nominal” impact, meaning at least a 10% reduction in your ability to provide goods or services, or 10% of the business measured by gross receipts or employee hours.
- Gross receipts fell below 50% of the same 2019 quarter (for 2020) or below 80% of the same 2019 quarter (for the first three quarters of 2021).
- The business qualified as a recovery startup: it began operating after February 15, 2020, and had average annual gross receipts of $1 million or less. This path applied only to the third and fourth quarters of 2021 and capped the credit at $50,000 per quarter.3IRS. Employee Retention Credit: 2020 vs. 2021 Comparison Chart
Even when the business qualifies, the owner’s own compensation still cannot be part of the calculation. Only wages paid to non-owner, non-related employees count.2IRS. Frequently Asked Questions About the Employee Retention Credit
Whose Wages Don’t Count: Owners and Family
For many small and family-run businesses, this is where the ERC quietly disappears. Under IRC Section 51(i)(1), wages paid to a majority owner — someone who holds more than 50% of a corporation’s stock or more than 50% of the capital and profits interests of another entity — generally do not count as qualified wages.4The Tax Adviser. IRS Guidance Denies ERC for Most Majority Owners’ Wages
The constructive ownership rules under Section 267(c) extend the exclusion. If the majority owner has any living spouse, ancestor, lineal descendant, or sibling, those relatives are treated as constructive majority owners. That relationship pulls Section 152(d)(2) into play and disqualifies the direct owner’s wages. The owner’s spouse can be disqualified on the same logic.4The Tax Adviser. IRS Guidance Denies ERC for Most Majority Owners’ Wages
Family members whose wages are excluded include children, siblings and step-siblings, parents and step-parents, grandparents, nieces, nephews, aunts, uncles, most in-laws, and anyone sharing the taxpayer’s principal residence for the year. The IRS has flagged businesses that reported family members’ wages as qualified wages as a recurring sign of an incorrect claim.2IRS. Frequently Asked Questions About the Employee Retention Credit
A narrow exception: if a majority owner has no living relatives as defined in Section 267(c)(4) — no spouse, ancestor, descendant, or sibling — the owner’s wages and the spouse’s wages may qualify.4The Tax Adviser. IRS Guidance Denies ERC for Most Majority Owners’ Wages
For a sole proprietor whose payroll is mostly family, the honest answer is that little or none of that payroll qualifies.
How Much the Credit Is Worth
The credit was much more generous in 2021 than in 2020.
For 2020, the ERC equaled 50% of qualified wages up to $10,000 per employee for the entire year. Maximum: $5,000 per employee.
For the first three quarters of 2021, the credit rose to 70% of qualified wages up to $10,000 per employee per quarter. Maximum: $7,000 per employee per quarter, or up to $21,000 per employee across the three quarters.3IRS. Employee Retention Credit: 2020 vs. 2021 Comparison Chart
The Infrastructure Investment and Jobs Act ended the program after the third quarter of 2021 for most employers. Recovery startup businesses could claim through the fourth quarter of 2021.3IRS. Employee Retention Credit: 2020 vs. 2021 Comparison Chart
Is It Still Possible to File a Claim?
For most quarters, no. ERC claims are filed on an amended employment tax return, typically Form 941-X, with a separate form for each quarter.5IRS. Instructions for Form 941-X The deadline for 2020 quarters passed on April 15, 2024. The deadline for the first and second quarters of 2021 expired on April 15, 2025.6Buchanan Ingersoll & Rooney. The One Big Beautiful Bill Extends Statute of Limitation for the Employee Retention Credit and Limits Outstanding Claims
The One Big Beautiful Bill Act, enacted by mid-2025, went further: it banned ERC claims filed after January 31, 2024, for the third and fourth quarters of 2021.7Nixon Peabody. ERC Update: OBBB Act and the Final Phase for the Tax Credit
If you already filed a claim and it hasn’t been processed, expect delay. As of early April 2025, more than 597,000 unprocessed ERC claims remained in IRS inventory, and the National Taxpayer Advocate estimated processing might not finish until the end of calendar year 2025.8Taxpayer Advocate Service. The ERC Claim Period Has Closed By early 2026, the Taxpayer Advocate reported “no updates” on progress, citing a lapse in appropriations and reduced staffing capacity.9Taxpayer Advocate Service. Objective 6, 2026
Risks If You Already Claimed
The IRS has been aggressive on improper claims. As of late 2023, IRS Criminal Investigation had opened 352 investigations covering more than $2.9 billion in potentially fraudulent claims, producing 18 federal charges, 11 convictions, and four prison sentences averaging 21 months.10IRS. IRS Intensifies Work on Employee Retention Credit Claims On the civil side, the IRS had issued disallowance notices for roughly 84,000 returns as of early 2025.8Taxpayer Advocate Service. The ERC Claim Period Has Closed
The IRS’s own warning signs of an incorrect claim include essential businesses that stayed fully open without a decline in gross receipts, businesses that cannot prove a government order caused a more-than-nominal suspension, and businesses that included wages paid to owners or family members.2IRS. Frequently Asked Questions About the Employee Retention Credit
The One Big Beautiful Bill Act also extended the IRS’s statute of limitations for assessing ERC-related taxes from five years to six, which means audits and assessments are possible as late as January 2030. The law also enhanced penalties targeting ERC promoters.7Nixon Peabody. ERC Update: OBBB Act and the Final Phase for the Tax Credit A self-employed business owner who claimed the credit on the strength of a promoter’s pitch, and whose payroll was mostly family or mostly the owner, should treat that exposure seriously.