Alert! On November 15th, 2021, President Biden signed into law the Infrastructure Investment and Jobs Act that Congress had recently passed. This act has brought about an important change in regards to the Employee Retention Tax Credit (ERTC) – businesses now have a new expiration date of September 30th, 2021 for this credit.
Consequently, companies are strongly encouraged to take advantage of this beneficial tax credit before it expires at the end of September.
In 2020, the Employee Retention Credit (ERC) became an important part of the global response to COVID-19 relief efforts. This credit provides eligible employers with a financial incentive to retain their employees and keep them on payroll.
With this program, employers can receive up to $28,000 per employee in 2021 through the end of 2021. The ERC has been highly successful in helping businesses stay afloat during these difficult times and is expected to continue providing valuable assistance until at least the end of 2021.
But, what about wages paid to shareholders? Are you able to claim the Employee Retention Credit (ERC) on owner wages as well? Get all of the details regarding claiming the ERC for owner wages here.
Shareholder Wages For Employee Retention Credit
Shareholders, or owners of a business, are people who have invested in the company and its equity. In some cases, these individuals can receive wages for their services as an employee of the company.
However, whether or not these wages count towards the Employee Retention Credit is contingent upon the specific circumstances. Before delving into this issue more deeply, it may be helpful to provide a refresher on shareholders and their wages - after all, understanding how they're related can help clarify if ERC owner wages qualify for retention credit.
Shareholders are considered to be partial owners of a company as they possess a certain number of shares in the entity. In some cases, one shareholder may possess majority ownership by having more than fifty percent of the company's total issued shares.
This means that the individual or organization holds a significant level of power and influence within the business, potentially allowing them to make decisions on behalf of all other shareholders.
You should consider a few things when determining shareholder wages and Employee Retention Credit:
- Related individuals’ wages
- Percentage of shareholder ownership
Employee Retention Credit and Shareholder Wages
When it comes to the Employee Retention Credit (ERC), the percentage of ownership is an important factor to consider. The U.S. Internal Revenue Service (IRS) takes this into account when determining eligibility for the credit, as wages paid to those who own greater than 50% of a business may not be eligible for the ERC.
However, there are other criteria that must be met in order to qualify for the credit, and these should also be taken into consideration when assessing eligibility.
The Internal Revenue Service (IRS) examines the wages of not only the majority shareholders, but also those of any related individuals - such as family members - to ascertain whether or not the company can benefit from this particular tax credit.
The Internal Revenue Service (IRS) has verified that salaries paid to majority shareholders, who have related individuals in their employ, are not eligible for the Employee Retention Credit (ERC). All parties considered related include, but are not limited to, spouses, parents, and children of the primary shareholder.
- Sister, brother, stepbrother, or stepsister
- Child or a descendant of a child
- Father or mother (or an ancestor of either)
- Stepmother or Stepfather
- Uncle or Aunt
- Son-in-law, mother-in-law, daughter-in-law, father-in-law, sister-in-law or brother-in-law.
- Niece or nephew
If the eligible employer is a corporation, then any individual who has an association with someone that directly or indirectly owns more than 50% of the total value of the outstanding stock in the corporation can be considered as a related individual.
This could include family members of such individuals, persons in positions of authority within the company, or other people that have some sort of connection to those that have majority ownership rights in the business.
In the event that the eligible employer is an entity other than a corporation, the related individual may be someone who has some kind of connection with any person, either directly or indirectly owning more than 50% of both the capital and profits’ interests in that particular entity.
In this instance, it is important to note that such relationships must extend beyond simply being a shareholder or owner.
Section 267(c) of the Internal Revenue Code defines the attribution rules for entity-to-member, family, and partner-to-partner relationships with respect to direct and indirect ownership.
These rules specify how an individual or entity can be attributed with interests in another person's property or business. They also include limitations on the reattribution of interests from one party to another.
Family attribution of ownership is an established practice that involves the direct owner and their relatives in the form of siblings, spouses, forefathers, and progeny.
This significant rite is conducted irrespective of whether any part of the business is owned by such family members or not.
Family attribution rules are a mechanism that can lead to indirect ownership of a business if the direct owners have familial connections.
This means that an individual who has only a small portion of direct ownership may, through this process, be attributed with additional shares and thus acquire a larger total share of both direct and indirect ownership in the company.
Wages paid to any individual who is related to a more-than-50% owner of the company do not qualify as wages that can be claimed for the Employee Retention Credit (ERC).
Nevertheless, if an owner and their spouse are both employed by the business in question, then wages paid to each are eligible for the credit.
With the Employee Retention Credit, only some salaries are eligible. The key questions for shareholders are: 1. Are they dominant shareholders with greater than 50% ownership? 2. Were the wages given to a "connected individual"? Moreover, the attribution of ownership may prevent some wages from being included in the ERC.
Example wages for ERC shareholders
Employee Retention Credit (ERC) can be a bit complicated to comprehend, especially when it comes to shareholder wages. To gain an understanding of how the credit works and if your business is suitable to benefit from it, you may find it useful to look at some illustrative examples. This can help you decide whether or not you should take advantage of this potential tax break.
Mother and daughter
Pam is the sole proprietor of ABC Corporation, owning the entirety of it. Despite having a daughter, Meredith, who does not actively participate in the business and has no stake in its ownership, Pam remains as the single holder of all rights to the company.
ABC Corporation pays wages to Pam, with Meredith being attributed 100% ownership of ABC and thus both parties - Pam and Meredith - being treated as if they were full owners. This is due to attribution rules, which dictate that all profits and losses must be shared equally between the two. Consequently, the wages paid out to Pam are seen as coming from a joint enterprise, in line with the aforementioned regulations.
Pam's wages, although paid by Meredith who is not employed by the corporation, are still not qualified for the Employee Retention Credit (ERC) due to direct and indirect ownership. This is because the funds were acquired through a direct or indirect relationship with the company. Therefore, these wages do not qualify as ERC eligible wages even though Meredith does not work for the company.
Father and son
The father, owning a full 100% of the corporation, and his son working for him would generally render the son ineligible for the Employee Retention Credit due to their familial relationship. As such, any wages earned by the son from this family-owned business will not be taken into consideration when determining eligibility for this particular tax credit.
Due to the familial relationship, the son is also viewed as an indirect proprietor of the business, which therefore prevents the father's salary from being eligible for the Employee Retention Credit (ERC). Consequently, both father and son are disqualified from this particular benefit.
Husband and wife
Scott and Karen, who are married to each other, own 100% of a corporation. Both of them serve as employees for the business, but neither have any family members that would be subject to the attribution rules. Consequently, their company is completely owned by themselves without interference from outside parties.
Although Karen is the sole owner of the corporation, due to her relationship with Scott, the Internal Revenue Service (IRS) does not consider them as “related individuals”. As a result, any wages paid to both Scott and Karen are eligible for the Employee Retention Credit (ERC). Consequently, this allows Karen and Scott to benefit from tax credits despite their affiliation.
Wrapping Up
This helpful article is all about Employee Retention Credit (ERC) and owner wages. We trust that you have found it to be both informative and useful in understanding this important topic. We hope that this has provided you with the information that you need in order to make informed decisions about employee retention incentives for your business.