The Internal Revenue Service released Notice 2021-49 on August 4th providing additional guidance on the employee retention credit (ERC). This Notice addresses one of the most frequent questions we receive:
Are wages paid to an employee who owns more than 50% (majority owner) of a corporation qualified wages for purposes of the ERC?
In Notice 2021-49, the IRS states that a majority owner of a corporation is a “related individual” for purposes of the ERC, but only if the majority owner has a specified relative under the IRC §267 attribution rules: a brother or sister (whether by whole or half-blood), ancestor, or lineal descendant. This is true even if that relative is not an owner or an employee of the corporation
Note: For purposes of the Employee Retention Credit Update, a spouse is not a “related individual”.
However, if the majority owner has NO specified relatives, the wages paid to the owner QUALIFY for the employee retention credit!
If this guidance seems baffling to you, you are not alone. It kind of seems to us like Congress missed the boat on this one by including the limitation on eligibility given the spirit of the law was to provide businesses relief due to the pandemic. However, that is a story for another day.
Let’s review two examples from the ERC 2021 August notice to clarify owner-employees who may qualify for the Employee Retention Credit
- ABC Corp. is owned 100% by Paul. Paul has one son, James, who is not employed by the corporation, and has no ownership interest in the corporation. ABC pays wages to Paul. Under the attribution rules of IRC §267(c), Paul’s son James is attributed 100% ownership of ABC, and both Paul and James are treated as 100% owners. As a result, wages paid to Paul are not qualified wages for purposes of the ERC.
- LMN Corp. is owned 100% by Jack. Jack is married to Karen, and they have no other family members as defined in IRC §267(c)(4). Jack and Karen are both employees of LMN. Under the attribution rules of IRC §267(c), Karen is attributed 100% ownership of LMN, and both Jack and Karen are treated as 100% owners. However, Jack and Karen are not considered “related individuals.” As a result, wages paid to Jack and Karen are qualified wages for purposes of the ERC.
The Takeaway on the Employee Retention Credit Update for August 2021:
If you are effectively paying yourself (or a spouse) a salary by way of a Corporation or S-Corp, the wages you paid to yourself (and spouse) may be eligible for the Employee Retention Credit, so long as you have no ‘specified relative.’
In 2021, Moskowitz LLP’ clients have already received between $2,000 to over $200,000 per quarter in Employee Benefit Credits.
Find out what is due to you! Complete our short survey and we will contact you with an analysis of what you may be eligible to receive.
Steve Moskowitz and Moskowitz LLP appreciate the sweat, tears, and triumphs that go into building a business, and we want you to benefit from the tax laws. These tax breaks were enacted with you in mind. Your clients and employees are counting on you to claim what is yours.