The Employee Retention Credit (ERC) is a tax credit available to employers who have been affected by the COVID-19 pandemic. The credit is designed to help employers keep their employees on payroll and cover certain expenses related to the pandemic. But are wages paid to owners of businesses eligible for the ERC?According to the IRS, wages paid to people who are family members of the owners by more than 50% are not counted as salaries for the purposes of the ERC. This applies even if family members are not on the payroll.
Reimbursable credit paid to a struggling employer and to the landlord and spouse, on the other hand, are eligible for the credit. Thanks to new IRS guidance, the salaries of small business owners can now qualify for the ERC. The eligibility of wages paid to majority shareholders depends on several factors, such as their participation in the business and their relationship with other shareholders. If a salary is greater than 50% of the owner and spouse, it may qualify for the ERC if there are no siblings, ancestors, or children involved. Constructive ownership means that family members of the majority owner must also be considered constructive owners of the business. The ERC cannot be used for wages paid in connection with the termination of a former employee's employment relationship.
This is because these payments are from a previous employment relationship and cannot be attributed to a period when an employer can claim the ERC. Additionally, any qualifying wages that are taken into account for the ERC cannot be considered for the Paid Family Medical Leave Credit under section 45S of the Internal Revenue Code. Qualified wages are calculated without taking into account federal taxes imposed or withheld, including employee or employer's share of social security taxes, employee and employer's share of Medicare taxes, and federal income taxes that must be withheld. Employers cannot calculate an employee retention credit based on salaries they have previously used to receive a Paycheck Protection Program (PPP) loan. In summary, wages paid to majority shareholders may or may not qualify for the ERC depending on their participation in the business and their relationship with other shareholders. Wages paid to family members by more than 50% are not counted as salaries for the purposes of the ERC.
Reimbursable credit paid to a struggling employer and to the landlord and spouse are eligible for the credit. Qualified wages must be calculated without taking into account federal taxes imposed or withheld.