Business owners eligible for the ERC must factor in family attribution rules when trying to include owner wages into qualified wages paid. Many rules have changed for wages earned by related individuals from the original CARES Act, to the American Rescue Plan Act, and Infrastructure Investment and Jobs Act, so be sure you’re following the latest updates.
Not all wages qualify for the Employee Retention Credit (ERC) and attribution of ownership can lead to some wage disqualification. As a shareholder, the absence of these two factors will determine your qualifications for the ERC business owners’ wages.
- You are a majority shareholder who has over 50% ownership
- The wages paid were to a related individual
The percentage of ownership is crucial when it comes to the Employee Retention Credit. This is because the wages paid to shareholders with over 50% ownership may not qualify for the ERC.
The Internal Revenue Service affirmed that paid wages principal stockholders could not qualify for the ERC. Relatives of the majority shareholders are also examined by the IRS, and their wages are scrutinized to detect the possibility of the business owners taking advantage of the credit.
As a rule, most S Corp owned businesses cannot claim the ERC. Some notable vital elements determine eligibility. Owner shares and shareholder relationships are major game players in Employee Retention Credit.
Anyone related to eligible employers with direct and indirect ownership in value of over 50% of the corporation’s outstanding stock is considered a related individual.
People with multiple ownership of less than 50% and partners with less than 50% ownership can claim the credit. Provided that there are no two or more owners who are immediate relatives with a combined ownership of more than 50%.
A Limited Liability Company is not typically eligible for the Employee Retention Credit, as owner wages are not paid from payroll, just business profits.
In case the eligible employer is a body different from cooperation, the related individual is anyone with a relationship with an over-50% direct majority owner or indirect owner of the capital and profit’s interests in the body.
The situation will determine if ERC owner wages add up for the retention credit. The wages of relatives who were your family members throughout the qualified tax years don’t count. It’s crucial to not include family member wages in the ERC application, as a miscalculation can lead to extended refund delays.
There is also family attribution of ownership, which happens between the direct owner and the owner’s spouse, the owner’s brothers, sisters, and lineal descendants. The attribution of ownership is regardless of the family member’s ownership of any parts of the company.
The rules of family attribution make living relatives of the direct owner indirect owners. Family attribution can also increase the portion of an owner with a small part of direct ownership by ascribing him to a more significant portion of direct and indirect ownership.
Wages paid by business relatives of the owner with over 50% shares or 50% of capital and profits interests will not count as wages for ERC. On the other hand, wages paid to an owner and his spouse will count for the ERC.
When a family member owns a business, most related party wages whether whole or half blood cannot be counted as qualified wages. In certain situations where no other family members are eligible under attribution rules, spouse wages can be included.
While you should always consult with an ERC expert when calculating qualifying wages, typically, none of the following payments to these related individuals would be eligible.
- Parents: Father or mother (or an ancestor of either), stepfather or stepmother
- Children: Child, stepchildren, or grandchildren
- Siblings: Brother, sister, stepbrother, or stepsister
- Familial: Aunt, uncle, niece, or nephew
- In-Laws: Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
Based on Sec. 267(c) direct and indirect definition, the attribution rules of the acting detail partner-to-partner attribution and entity-to-member attribution, coupled with the limits of reattribution.
Shareholders are regarded as partial owners of a business. Certain shareholders may possess over half of the company’s shares, making them majority shareholders. These factors are vital when it comes to shareholder wages Employee Retention Credit:
- Percentage of shareholder ownership
- Related Individuals wages
Personal Tax Returns
An exception would be if these owners’ company receipts are recorded and paid on the owner’s personal tax returns, then they would be eligible for the ERC.
In this case, the shareholder must be an employee in the company who is paid for services rendered. For tax-exempt organizations, tax professionals will be in the best position to give additional guidance on eligibility.
Some difficulties might accompany Employee Retention Credit shareholder wages. However, the examples below can help you grasp it and determine if your business can use it to your advantage.
Different eligibility criteria surround the familial lineage. One is that if the majority shareholder is without grandparents, brother, sister, or any lineal descendants, then the majority shareholder’s wages qualify for the credit. This criterion also incorporates salaries provided for the shareholder’s spouse.
Husband and Wife
John, a man who owns 100% of a business, is married to Linda, they are both business employees, and it happens that none of them has eligible family members based on the attribution rules.
Linda is attributed 100% ownership based on her marriage to John. However, the Internal Revenue Service does not regard John and Linda as related Individuals. Meaning that wages paid to John and Linda are considered qualified wages for the Employee Retention Credit.
Mother and Daughter
Elizabeth, a proud 100% owner of her own business and has only one child, Angel. Angel is not an employee of the company and is not interested in retaining any business owner. Elizabeth gets paid wages, and Angel has 100% attributed ownership of the company, being the only child of Elizabeth, making both of them 100% owners. In this case, Elizabeth’s wages are not eligible for employee retention credit due to direct and indirect ownership principles. At this point, it’s of no consequence that Angel was not working for Elizabeth or not.
Father and Son
Assuming Jacob employs Caleb, his son, to work for him in his company. Jacob, the father, has 100% ownership of the company. Based on Caleb’s relationship with Jacob, his wages are not eligible for the ERC. Because of the family attribution rules, which make Caleb an indirect owner, the father’s wages do not also qualify for credit.
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