Thanks to new IRS guidance, your small business owner wages may now qualify for receiving employee retention tax credit money.
Can an S Corp or C Corp Owner Claim an ERC?
Wages paid to majority shareholders may or may not qualify for the ERC. Qualification is based on owner share, how shareholders are related, and other factors mentioned below.
Can an LLC Owner Claim an ERC?
No. The reason LLC owners are not eligible for ERC owner wages, is because they’re paid from business profits not payroll.
What are Some Examples of Owner Wages That Qualify for ERCs?
- Under 50% owners
- Multiple under 50% owners – providing no two or more owners are immediate family members and have a combined ownership of 50% or more
What are Some Examples of Wages That Don’t Qualify for ERCs?
- 100% Owners
- Sibling owners with a combined ownership of 50% or more
On August 4, 2021, the IRS issued Notice 2021-49, that states majority owners of S-corporations and C-corporations will not be eligible for Employee Retention Credits. Although these ERCs were designed to help businesses suffering from the COVID-19 crisis, they don’t apply to majority owner wages, or to certain family member wages. The bottom line is that if you’re a 50% or more owner and you have a family member on your payroll, both you and your family member’s wages are not eligible.
What Majority Owner and Spouse Wages Qualify for ERCs?
A more than 50% owner and spousal wages are considered qualified wages if the owner has neither a sibling, ancestor, nor child.
What Family Member Wages Don’t Qualify for ERCs?
Wages paid to these family members of majority owners don’t qualify for ERCs:
• Child or descendant of a child
• Brother, sister, or stepchild
• Parent or parent ancestor
• Niece of nephew
• Aunt or uncle
• Anyone who lives with the taxpayer as a member of their household during qualifying tax years
Do Majority Owner Wages Ever Qualify for ERCs?
Thanks to a nuance in the law, a 50% or more owner’s wages qualify for ERCs. This applies to owners who don’t have a sibling, ancestor, or child.
What is Constructive Ownership?
Constructive ownership means that majority business owner family members must also be considered constructive owners of the business. This applies even if the family members are not on the payroll. The catch here is that the owner is then also considered a family member, and therefore their wages are disqualified.
It’s ironic that the only way this won’t apply to the business owner, is if they’re an orphan, or don’t have any living family members.
What Happens if I Make a Mistake Calculating ERC Owner Wages?
Unfortunately, making a mistake on these complex ERC owner wages could carry steep penalties.
Should I Hire an ERC Expert?
Based on the challenges presented by a constantly changing landscape of new rules and legislation, it’s a good idea to work with ERC experts. Having someone who prepares amended 941-X payroll tax returns on a regular basis and has success with getting paperwork processed successfully with the IRS will ensure that your ERC refunds progress smoothly and that your ERC checks arrive in a timely fashion.
Why Are Payroll Companies Offering ERC Services Worth Considering?
One advantage of working with a payroll company, is their ability to easily extract your payroll information from previous quarters, and correctly file your amended payroll tax returns.
Are ERC Owner Wages Worth Applying For?
In a word, yes. Why let the complexities of applying for ERC owner wages prevent you from navigating the obstacles and getting all the stimulus money you’re entitled to? Remember, this money was earmarked by Congress to help your business survive the COVID-19 crisis. Plus, it can add up to a lot of money. You can bet that your competitors are applying for this stimulus help. You should, too.