The way in which a business owner gets paid can have a significant impact on their tax liability. When it comes to business owners’ wages for Employee Retention Credit, there are no difficult rules, but there are major tax and cash flow considerations to contemplate.
Owner wages are the earnings that business owners pay themselves for work done to the company.
Key ERC Credit Takeaways You Will Learn:
- Owner Eligibility: Understand if business owners are eligible for Employee Retention Credit.
- Qualified Wages: Learn what qualifies as wages for the Employee Retention Credit, including owner wages.
- ERC Taxable Income: Determine if Employee Retention Credit is considered taxable income.
- ERC Calculation: Grasp how to calculate Employee Retention Credit for your business.
- Deadlines: Stay informed about Employee Retention Credit deadlines to maximize your benefits.
Breaking News Update to What are the Owner Wages for Employee Retention Credit?: The IRS temporarily paused processing ERC Claims for the remainder of 2023 due to companies charging fees based on a percentage of the refund amount of their Employee Retention Credit claimed, plus a list of other reasons.
We at Disaster Loan Advisors (DLA) predicted this over one year ago when we made this ERC video warning business owners. See the ten-minute mark of the video for details.
Even though IRS processing has temporarily paused, you will still want to file now (if you qualify) because the IRS will resume processing tax credit claims in the order they are received.
Business owners that have not filed for the ERC Credit yet? DLA will provide a Free ERC Consultation where we’ll do a deep-dive analysis to determine if you even qualify for tax credit. Everything we do is by-the-book per IRS rules and guidelines.
ERC Owners Wages
Since wages given to more than 50% of owners may not be eligible for the credit. And it isn’t the only factor that the IRS considers. The IRS also looks at the earnings of connected persons (family) of major shareholders to see if the firm qualifies for the credit.
If the majority of stakeholders have connected persons, the IRS certified that wages received from them do not qualify for the ERC safe harbor. Individuals who are related include:
- A child or a child’s descendent
- Stepbrother, stepsister, or stepbrother
- Is it your father or mother? (or an ancestor of either)
- Father or mother-in-law
- nephew or niece
- Uncle or aunt
If the qualified owner is an organization, the linked individual is someone who has a direct or indirect relationship with someone who owns more than 50% of the corporation’s outstanding shares.
If the qualifying employer is not a corporation, the linked full-time employee is any person who has a direct or indirect relationship with any individual who owns more than 50% of the entity’s capital, income tax return, and earnings interests.
Check out Eligibility for Employee Retention Credit.
The direct owner’s brothers as well as sisters, spouses, grandparents, and even lineal descendants are all involved in the attribution of ownership.
If they are connected to the direct owners, family attribution rules generate indirect owners of a firm. Furthermore, attribution might result in an owner with a small direct ownership percentage having a bigger direct and indirect ownership portion.
Wages paid to persons who are more than 50% owners’ relatives do not count as qualified wages under the ERC. Refundable credit paid to a distressed employer and owner and his or her spouse, on the other hand, are eligible for the credit. The basic truth is that the Employee Retention Credit is only available for specific pay and for recovery startup businesses.
Do Majority Owners Qualify for the ERC?
According to the IRS notice, the owners are not eligible for the owner wages of relatives of small businesses who “bear any of the relationships defined in section 152(d)(2)(A)-(H), “1 including:
- A brother, sister, or other relatives
- Child or descendant of a child
- A descendant of a descendant of a descend
Surprisingly, the notification goes even farther, claiming that if the firm owners have any family members, their pay does not qualify for the ERC under section 267(c).
Can an Owner Claim the Employee Retention Credit?
On August 4, 2021, the IRS issued Notice 2021-49, which gives companies new information on the Employee Retention Credit (ERC), including whether the earnings of majority owners can be considered as wages paid that qualify for the ERC. The new guidance makes it clear that the answer is no in the vast majority of circumstances. Check out more about 8 Strategies on How to Claim the Employee Retention Credit.
Individuals linked to a majority owner of the employer (one who owns more than 50% of the value of an employer corporation’s outstanding shares or more than 50% of the capital and earnings interests of other businesses) were already excluded from receiving the credit. For this purpose, related people include, according to Sec. 152, (d)
What are Qualified Wages for the Employee Retention Credit?
Employee Retention Credit qualified wages are the wages given to a qualified employee that is used to calculate the amount of credit that can be claimed under Section 45P. Beginning in the employee’s first complete taxable year of work with the employer and the credit is available for each of the first five taxable years.
The credit is only available for wages given to a qualifying employee who is not a highly compensated employee for this reason. Employee retention credit qualifying earnings provide the following advantages:
- Employers may be able to offset their Social Security tax burden with the credit.
- Employers can use the credit to lower their federal income tax burden.
- Any firm that pays qualifying wages to a new recruit is eligible for the credit.
- The credit can also be applied to state income tax bills.
Experts can assist you in understanding the credit and how to apply for the ERC, so that you can keep your top employees pleased and on the job.
Wages for employees are usually clear. These are the wages you pay your workers. Healthcare expenditures may be included in these wages, depending on how your firm is set up.
The ERC, on the other hand, interprets these payments differently because the tax credit is intended to assist you with wages paid to employees who were unable to work. You can claim credit for wages given to employees who were unable to work because of government orders or a large drop in your company’s gross receipts.
For example, if your company employed more than 100 individuals on average in 2019 and 2020, you can only claim qualifying earnings for employees you kept but were unable to work. In addition, starting in 2021, if your company employs 500 or more people, you can only claim qualifying earnings for workers you kept but were unable to work. Read full do restaurants qualify for ertc details here.
Employee Retention Credit Owner Wages Examples
Wages for Employee Retention Credit shareholders might be tricky. Check out the sample below to get a better picture of how it all works and whether your company qualifies for the credit.
Consider the case of a parent who owns 100% of a company and employs his son. The Employee Retention Credit does not apply to the son’s earnings since he is related to the more-than-50% owner.
The son, too, is considered a secondary owner of the corporation due to familial attribution. This also eliminates the father’s earnings from the ERC.
Pam is the only owner of ABC Corporation. Meredith, her only child, does not work for the firm and does not hold any shares.
Pam is paid by ABC Corporation. Meredith is given 100% ownership of ABC due to attribution regulations; therefore, both Pam and Meredith are recognized as 100% owners.
Even if Meredith does not work for the firm, Pam’s salary is not eligible wages for the ERC due to direct and indirect ownership.
2021 Employee Retention Credit Owner Wages Examples
Another example of 2021 ERC owner wages is:
Wife And Husband:
Scott is the sole owner of a company and is married to Karen. They are both employed by the business. Scott and Karen have no relatives who come under the attribution criteria.
Karen is given 100% ownership of the business because of her relationship with Scott, but the IRS does not consider Scott and Karen to be “related people.” As a result, Scott and Karen’s earnings are eligible for ERC.
Is ERC Taxable Income?
Both yes and no. Although the ERC is not taxable, it is subject to cost disallowance laws that essentially render it taxable.
For example, if a company receives $200,000 in ERCs, it must lower its deductible wage expenditures, including qualifying health plan expenses, by $200,000, resulting in an additional $200,000 of income being taxed.
The expenditure reduction requirements apply to wages paid or incurred in 2020 and reimbursed by the ERC, including eligible health plan charges. Any amount of the ERC has no effect on the employer’s deduction for its contribution of Social Security and Medicare taxes.
How to Calculate Employee Retention Credit with Wages Paid?
It’s not easy to figure out how to calculate Employee Retention Credit. The Employee Retention Credit is worth 50% of qualifying employee pay earned in a calendar quarter in 2020. Wages paid between March 12, 2020, and January 1, 2021, are eligible for the credit. The maximum credit for eligible earnings paid to any employee for 2020 is $5,000 since eligible wages per employee are capped at $10,000.
The Employee Retention Credit is worth 70% of qualifying employee pay earned in a calendar quarter in 2021. In 2021, the maximum credit for eligible earnings paid to any employee is $28,000, because eligible wages per employee are capped at $10,000 every calendar quarter.
A Tax Credit Estimator, which may be found on a variety of websites, can help you with the calculation. However, consider the following points to calculate ERC:
- In 2020, the Employee Retention Credit was worth 50% of eligible employee compensation received during a calendar quarter.
- Wages earned from March 12, 2020, through January 1, 2021, are eligible for the credit. Because the system was to send eligible pay to any employee for 2020 is $5,000, the maximum credit on eligible this has to any employer is $10,000.
- The Employee Retention Credit will be approximately 70% of the qualifying employee salary earned in a calendar quarter in the calendar year 2021. Because the maximum credit for qualified earnings paid to every employee in 2021 is $28,000, the system for eligible pay to any employee in 2021 is $10,000.
Qualified earnings include salary and health-plan expenses earned during your financial hardship.
Do S Corp Owner Wages Count Employee Retention Credit?
S-Corps and C-Corps owners may be entitled to the ERC since company receipt is recorded and paid on their personal tax returns. Shareholders must work for the company and be paid by it to be eligible. If you are a tax-exempt organization, then for additional guidance and eligible expenses, consult with experts.
On August 4, the IRS issued notice 2021-49, stating that now the Employee Retention Credit, which had been made available to S Corp owners affected by the COVID-19 crisis, would not be obtainable for the amount paid to a major shareholder or such landlord’s spouse if the majority owner does have a brother and sister, forefather, or distant lineal relative.
If a corporation’s majority owner has no brother or sister (all or half-blood), grandfather, or lineal descendent, then wages are given to the major shareholder and his or her spouse qualifies for the Employee Retention Credit.
Only orphans without children are eligible for the credit, whereas persons with big families require it to sustain their families.
Is There an Employee Retention Credit Deadline?
The Employee Retention Tax Credit (ERTC) was extended until June 30, 2021, as part of the COVID-19-related Tax Relief Act of 2020. It incorporated certain improvements that took effect on January 1, 2021.
Learn more about Everything You Should Know About Employee Retention Tax Credit Deadline.
President Biden signed the Infrastructure Investment and Jobs Act (IIJA) in November 2021, thereby ending the ERTC for the 4th quarter of 2021. This restricted the use of ERTC to certain dates between March 13, 2020, and September 30, 2021, as per wages for the purpose of recovering startup businesses.
Building service contractors are among the businesses that have been hit financially by the COVID-19 outbreak during the last two years. While no government program will be able to entirely compensate for the earnings lost as a result of site closures and general loss of business, there is one that can help.
Despite an early deadline of October 2, 2021, small companies may still submit for the Employee Retention Tax Credit or simply Employee Retention Credit Rules of Sections.
Conclusion and Summary
The Employee Retention Credit is only available for specific owner wages. It all depends on whether or not a shareholder is:
- A dominant shareholder with greater than 50% ownership and
- If wages were given to a “connected individual.”
In addition, some earnings might not be included in the ERC due to attribution of ownership. Prior to requesting credit, it is important to understand familial and commercial ties. A constructive ownership law may be used to determine that a firm’s owners own more than 50% through family members, trusts, or partnerships.
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Get the Employee Retention Tax Credit (ERC / ERTC): Receive Up to $26,000 Per Employee for Your Business
Disaster Loan Advisors can assist your business with the complex and confusing Employee Retention Credit (ERC) and Employee Retention Tax Credit (ERTC) program.
Depending on eligibility, business owners and companies can receive up to $26,000 per employee based on the number of W2 employees you had on the payroll in 2020 and 2021.
The ERC / ERTC Program is a valuable tax credit you can claim. This is money you have already paid to the IRS in payroll taxes for your W2 employees.
Schedule Your Free Employee Retention Credit Consultation to see what amount of employee retention tax credit your company qualifies for.
Cover Image Credit: 123RF.com / Deagreez / Disaster Loan Advisors.