Using LLC’s to Get the Employee Retention Credit
It seems like everyone is talking about the Employee Retention Credit (ERC).
First of all, what is the ERC? The ERC is a refundable tax credit for businesses that continued paying their employees while shut down during the pandemic. Businesses that had a large reduction in their profits from March 13, 2020 – December 31st, 2021, may also be eligible.
But, what if you are self-employed? The pandemic was hard on you too, and you want this credit! You may go to an accountant who suggests setting you up as an LLC. Doing so may make you “eligible” for the ERC. That seems like an easy solution, but is it a good idea?
Is the LLC a Problem?
Your accountant may suggest forming an LLC to create what looks like a company that qualifies for the credit. Unfortunately, your accountant may be creating legal fiction. The accountant may suggest a business that does not really exist, and that is a business entity that has paid employees.
In general, LLC’s with no employees are not qualified to receive the Employee Retention Credit. The exceptions are owners with less than 50% ownership or multiple owners who have less than 50% ownership of the business.
The ERC is not available to you as your own employee. The Employee Retention Credit would only be available if you have paid employees. The wages that you pay your employees are what the IRS uses to determine if you are eligible for the credit and how much the credit will be.
The problem arises when you falsely claim and receive this credit and then find yourself under audit. The fact that you are the only employee is unfortunately going to result in a negative outcome for you. What are the consequences of falsely claiming the ERC?
You are ultimately responsible for the information reported on your tax returns. Fraudulently claiming the ERC, even if you were advised to do so by your accountant, will result in you having to repay the credit plus either 20% or 75% penalties, plus interest.
If you find yourself in this situation, strongly consider getting legal representation. Audits, and especially audits regarding fraudulent tax returns, have real legal consequences. You need to find a qualified tax attorney that you can trust. That attorney will have the knowledge and resources to give you the best possible help in this situation.