The Employee Retention Credit (ERC) is a refundable tax credit that helps struggling employers and landlords. Unfortunately, not everyone is eligible to receive the credit. Wages paid to family members of the owners by more than 50% are not counted as salaries according to the ERC. The owners of an LLC cannot apply for the credit because their salaries come from the company's profits, not from the payroll.
Thanks to new IRS guidelines, small business owners can now qualify for the ERC. Whether or not wages paid to majority shareholders are eligible for the credit depends on the owner's participation, the relationship between shareholders, and other factors. The owners of an LLC are not eligible to receive the salaries of ERC owners because they are paid with the company's profits, not with the payroll. A salary greater than 50% of the owner and spouse is considered qualifying wages if the owner has no siblings, ancestors, or children.
Constructive ownership means that majority members of the family that owns the company must also be considered constructive owners of the company, even if they are not on the payroll. This means that landlords are also considered a member of the family and their salary is disqualified. The IRS has clarified when salaries paid to majority owners (more than 50%) and their spouses qualify for the ERC. Unfortunately, in nearly every situation, majority homeowners and their spouses won't qualify for credit.
If the majority owner has any living family members other than their spouse (by blood or marriage), their salary may not be eligible.
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