Do Owners’ Wages Qualify for the ERC?
August 25, 2021
At a glance:
- New ERC guidance: In a Notice released August 4, 2021, pertaining to the ERC, the IRS issued new guidance that will effectively disqualify most wages paid to majority business owners and their spouses.
- Impact on your business: Any business owners with more than 50% interest in the business and a living relative may need to reconsider their approach to Qualified Wages, regardless of whether those family members are on the payroll.
- Next steps: As the rules surrounding the ERC continue to grow more complex, businesses should consider working with a knowledgeable tax advisor to understand how these rules impact credit value and audit risk.
Don’t let recent IRS guidance jeopardize your credits. Contact Aprio’s ERC team to maximize your credit value and minimize audit risk.
The full story:
The IRS finally released official guidance on the eligibility of wages paid to business owners and their spouses for the Employee Retention Credit (ERC) – and it’s not good news for Eligible Employers.
Notice 2021-49 (the “Notice”), issued August 4, 2021, clarifies that business owners’ wages can only be included in the credit if they have no living family members* and have 50% or less ownership in the business. In effect, the wages paid to owners and their spouses will be ineligible for the ERC for the vast majority of businesses claiming the credit if the owner has a majority interest in the company.
*family members are defined as grandparents, parents, children, grandchildren, brothers and sisters, as applicable throughout this article.
Breaking the silence
This is the first definitive position the IRS has provided on the eligibility of owners’ and spouses’ wages, as previous guidance left room for interpretation and confusion. Until the Notice was issued, businesses could only rely on the position explained in FAQ 59 from the IRS FAQs for determining qualified wages.
FAQ 59 answers whether wages paid by an employer to certain family members are considered qualified wages. Rather than broadly excluding all wages paid to all related individuals, the IRS specifically excludes these employer-employee relationships:
- A child or a descendant of a child;
- A brother, sister, or stepsibling;
- A father or mother, or an ancestor of either;
- A stepfather or stepmother;
- A niece or nephew;
- An aunt or uncle; and
- A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
This guidance also explains that, for corporations, a related individual is any person that shares one of the relationships listed above with the individual owning more than a 50% stake in the corporation.
Notably, this answer provided by the IRS does not state that an owner or an owner’s spouse should be excluded from qualified wages, nor does any other legislation or official guidance pertaining to the ERC – until now. The Notice definitively states that, in addition to the rules outlined in FAQ 59, business owners must also apply the constructive ownership rules detailed in section 267 of the Internal Revenue Code.
Defining constructive ownership
Constructive ownership rules state that a living family member of a business owner must also be considered a constructive owner of the business, regardless of whether that family member is on the payroll. So, if you own more than 50% of a business and have living family members, the IRS considers those family members to be constructive owners in that business. If you have any constructive owners, that in turn makes you a “related individual,” as defined by FAQ 59, and disqualifies your wages because now you have a familial relationship with an “owner.”
In other words, between FAQ 59 and applying constructive ownership, the Notice creates a vicious cycle that will almost always exclude majority owners’ and their spouses’ wages from the ERC. Factor in family attribution rules, and you’ve got a recipe for a highly complex ERC calculation that could carry steep penalties if claimed incorrectly. That’s why we cannot recommend strongly enough that all businesses claiming the ERC work with a knowledgeable tax advisor that can help you understand and apply all of the relevant rules.
Much of the recent guidance pertaining to the ERC has made benefiting from the ERC more complex and challenging than ever before. We know this can be frustrating, which is why Aprio’s dedicated ERC team makes it our top priority to always stay up-to-date on the latest rules. You can count on our skilled advisors to maximize your credit values while always remaining within the bounds of the regulations, and we will never calculate a credit that your can’t defend.
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Aprio’s goal is to provide the most up to date information, along with our insights and current understanding of these programs and regulations to help you navigate your business response to COVID-19.
The rules regarding SBA programs are constantly being refined and clarified by the SBA and other agencies In certain instances, the guidance being provided by the agencies and/or the financial institutions is in direct conflict with other competing guidance, regulations and/or existing laws.
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You need to evaluate and draw your own conclusions and determine your Company’s best approach relative to participation within these programs based on your Company’s specific circumstances, cash flow forecast and business strategy.
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About the Author
Justin Elanjian, CPA, is the Partner-in-Charge of Aprio’s Paycheck Protection Program (PPP) & Employee Retention Credit (ERC) Services. As a national PPP expert, prominent speaker and strategic business advisor, Justin helps both lenders and borrowers navigate the complexities of the PPP. He also helps his clients realize benefits from other stimulus package programs, such as the ERC, and is committed to strengthening his clients’ balance sheets and helping them achieve what’s next. Justin also leads a team of more than 50 professionals who share his passion for helping businesses maximize the federal COVID relief programs.