The IRS recently issued a very confusing notice regarding the Employee Retention Credit (ERC). Before we get into that, though, let’s talk about what the ERC actually is.
The Credit first came about with the CARES Act, the first federal Covid relief package. The idea was that businesses could receive a credit back from wages they paid to employees in 2020 and 2021. Eligible businesses can claim up to 70% back on up to $10K in wages, for a maximum amount of $7K per employee per quarter.
There are several requirements in order to take the ERC. The business needs to have 500 employees or less. There needs to be a 20% reduction in gross receipts in one 2021 quarter compared to the same quarter in 2019. Or if there isn’t a reduction, businesses would need to have been shut down to some extent by the government due to Covid.
If an employer has paid 2020 taxes, ERC can be claimed retroactively for a refund. Use Form 7200 to file for your credit.
You can only claim the credit in quarters in which there is the requisite decline in gross receipts. So you may find some quarters qualify while others do not.
Wages paid, in general count as qualifying wages. Guaranteed payments from a partnership are not wages. The IRS made it even more difficult to qualify for qualifying wages with their new Notice 2021-49.
Wages paid to the following members of an owner in a partnership or corporation are NOT qualifying wages:
- Child or descendant of a child
- Brother, sister, stepbrother, or stepsister
- Father, mother, or ancestor of either
- Stepfather or stepmother
- Niece or nephew
- Aunt or uncle
- Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
- An individual (other than a spouse) who has the same principal place of abode and is a member of the household
The combination of the above rules has led to confusion as to whether the wages of a majority owner of a corporation and/or the members of the owner’s family can be ERC-eligible Qualified Wages. (Reminder: The earned income of a partner or other self-employed individual does not constitute ERC-eligible Qualified Wages.) In this regard, the Notice provides as follows:
If a majority owner of a corporation has no brother or sister (by whole or half-blood), ancestor, or lineal descendant, the wages of the owner and/or the owner’s spouse are eligible to be Qualified Wages.
The wages of a majority owner of a corporation who has a brother or sister (by whole or half-blood), ancestor, or lineal descendant, are not eligible to be Qualified Wages.
The wages of the spouse of a majority owner are not eligible to be Qualified Wages if the majority owner has a brother or sister (whether by whole or by half-blood), ancestor, or lineal descendant, where the spouse and family member have one of the family relationships described above.
These rules apply even if the relative is not an employee of the corporation; for example, if a majority owner has a brother, even if the brother is not an employee of the corporation, the majority owner’s wages are not ERC-eligible Qualified Wages.
Confusing? You bet. This is just one example of why it’s best to get experts to help you with tax filings. How can we help? Contact us!