Employee Retention Credit and Owner Wages

employee retention credit owner wages
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When the pandemic plagued the United States, it caused many different businesses, including S Corps and C Corps, to try to figure out ways to keep themselves and their employees afloat. Most companies assumed that only nonprofits, midsized businesses, or other entities were eligible for the ERC, but that is untrue.

There is an employee retention credit owner wages process you can follow to claim credits for owner wages. Of course, there are some situations where owner wages do not qualify but don’t worry; we will review them in this brief employee retention credit owner wages guide. Continue reading below to learn more about claiming owner wages and who you can reach out to for more information and guidance. 

What Is the Employee Retention Credit?

The employee retention credit was created under the CARES Act as a way to encourage employers to keep their employees on the payroll. Eligible businesses that qualify are able to claim the credit on qualified wages, including health insurance costs. 

What Employers Qualify for the ERC?

Most employers, even nonprofit organizations, colleges, hospitals, and universities, qualify for the ERC, so long as they meet two primary criteria. The first factor that determines eligibility surrounds the business’s operations.

A company or trade that had to either partially or fully suspend their business operations due to a government or state-issued order qualified for the credit. It is important to note that the credit only applies to the portion of the quarter that the business was suspended, not the entire quarter. If the company had to reduce business hours or stop operations for the whole quarter, then they can claim for the full quarter. 

A Decline in Gross Receipts

If your business did not qualify under the first criteria, there is another one your business may qualify under. For example, you could be eligible if your company had a significant decline in gross receipts.

In 2020, your business must have had at least a 50% decline when compared to the same quarter in the previous year. For the 2021 ruling, your business only needed a 20% decline in gross receipts compared to the same quarter in the previous year. 

Are Owners Eligible for Employee Retention Credit?

In general, most C Corp or S Corp-owned businesses cannot claim the employee retention credit. Qualification is mainly based on owner share, how the shareholders relate to one another, and other essential factors that determine eligibility. 

LLC owners cannot claim the employee retention credit because owner wages come from the business profits, not from payroll. Some owner wages do qualify for the ERC.

For example, those with less than 50% ownership or multiple owners with less than 50% ownership may claim the credit. So long as no two or more owners are immediate relatives and have combined ownership over 50%. 

Family Member Wages That Do Not Qualify

If you have family members who have ownership of your business, their wages do not qualify for the employee retention credit. 

Examples of family members’ wages that don’t qualify:

  • Spouse
  • Uncles or aunts
  • Parents
  • Children
  • Grandchildren
  • In-laws
  • Brothers or sisters
  • Stepchildren

If you have relatives that live with you as a member of your household during those qualified tax years, their wages do not count. It is crucial that you avoid miscalculating your family member’s wages when trying to apply for the ERC. Making a mistake on your return can cost you steep penalties and fines. 

S Corp and C Corp Businesses

As mentioned earlier, most S Corp and C Corp businesses cannot claim the credit due to several different factors, but there is an exception. These owners may be entitled to the ERC since their company receipts are recorded and paid on the owner’s personal tax returns. 

In order to be eligible, the shareholder must work for the company and be paid by it. For those who are tax-exempt organizations, it is best to reach out to a tax professional for additional guidance. 

Another eligibility requirement surrounds familial lineage. For example, if the majority owner does not have any grandparents, lineal descendent, brother, or sister, then wages provided to the majority shareholder qualify for the credit.

This also includes wages provided to the spouse. For further clarity on this, it is best to partner with a reputable company that specializes in completing employee retention credit forms. They have knowledgeable attorneys and tax professionals who can help you make sense of claiming the ERC for owner wages. 

Employee Retention Credit Owner Wages Examples

Figuring out the employee retention credit owner wages can be a bit complicated, especially if this is your first time trying to figure it out. To help understand how to calculate if your business qualifies for employee retention credit owner wages, let’s take a look at a few examples below. 

Husband and Wife

Let’s say the husband, Michael owns 100% of a corporation and is married to Sarah. Sarah and Michael are employees of the business, and neither of the two has family members that qualify under the attribution rules.

Although Sarah, due to her relationship with Michael, is attributed 100% ownership of the business, the IRS does not consider them as related individuals. This means that wages paid to Sarah and Michael qualify for the employee retention credit

Mother and Daughter

Jessica owns 100% of her business, JT Details, and she has a daughter, Jennifer, who doesn’t work for the company. Jennifer also has no interest in retaining any ownership in the company. 

JT Details pays wages to Jessica, but because of the attribution rules, Jennifer has attributed 100% ownership of the business. This means that both Jennifer and Jessica are both 100% owners. Due to the indirect yet direct ownership, Jessica’s wages are not qualified for the employee retention credit, even though Jennifer does not work for JT Details. 

Father and Son

Let’s say a father, Maurice, owns a business and employs his son, Kevin, to work for him. The father owns 100% of the company.

Because Kevin is a relative of an owner with more than 50% ownership, so his wages do not qualify for the employee retention credit. Due to the family attribution rule, the son is also an indirect owner of the business, which disqualifies the father’s wages from the credit. 

What Are Qualified Wages?

Qualified wages for the employee retention credit are wages or any form of compensation subject to FICA taxes. You also have the opportunity to claim certain health expenses that you paid on behalf of your employee. To qualify, you must have paid wages after March 12, 2020. 

When determining eligible health expenses, the IRS has several different ways of calculating them. For example, the IRS allows you to include your pretax portion in addition to the employee’s pretax portion. You are not able to claim any after-tax amounts. 

Full-time Employee Ruling

Per the 2020 rules for the ERC, businesses with less than 100 employees were only able to claim the total wages paid to their employees. Anyone who had more than 100 full-time employees was only able to claim wages paid to employees who did not work. 

In 2021, that ruling changed, allowing businesses with less than 500 full-time employees were able to claim both the wages paid for service and for the time employees were out of work. Any company with more than 500 full-time employees could only claim wages paid to employees when they weren’t working. 

Internal Revenue System’s Full-time Status 

For the purpose of the ERC, your full-time employees must meet the IRS’s definition of a full-time employee. Per the IRS, a full-time employee is someone that works at least 30 hours per week or at least 130 hours a month. 

Can You Include Tips in Qualified Wages?

You have the opportunity to claim tips as qualified wages only if they were subject to FICA. In general, tips less than $20 are not subject to FICA; therefore, they wouldn’t count. So this means any tips over $20, including that first twenty dollars, are eligible to be counted as qualified wages for the employee retention credit. 

How To Claim the Employee Retention Credit

Even though the employee retention credit program ended in 2021, businesses still have the opportunity to claim the credit in 2022. Instead of using the traditional 941 Form, companies must use the amended version, also known as Form 941-X.

The Internal Revenue Service typically provides you up to three years from when you originally filed your return to make any changes. So if you believe that you qualify for the employee retention credit, you will need to file amended payroll tax returns using the amended form. 

Two Ways To Claim the Employee Retention Credit

Unlike some other types of tax credits available to claim, the employee retention credit does not offset income taxes. Instead, it serves as a credit to reduce your portion of Social Security taxes. There are two different ways you can claim the credit. 

Reduce Employment Tax Deposits

The first way to claim the credit is by reducing employment tax deposits. You have the opportunity to reduce your employment tax deposits by the amount of your expected credit.

If the expected employee retention credit is more than your payroll tax deposits, you can send in a request for an advanced payment. You can do this by filing Form 7200.

Filing Form 941-X

As mentioned above, you can claim the ERC credit via the Form 941-X. If you are unsure how to fill out this document, make sure you reach out to a reputable tax professional for more guidance. 

Can I Claim the ERC if I Claim PPP?

Many business owners assumed they could not claim the employee retention credit if they had already claimed the PPP, but that is not true. Even if you received a loan from the Paycheck Protection Program, you could still claim the ERC, as long as you qualified.

The only caveat was that you could not claim the same wages that were expected to be or were already forgiven under the Paycheck Protection Program. For example, if you used the PPP loan to pay $40,000 of wages and expect to qualify for loan forgiveness through the PPP, you can’t use those wages for the employee retention credit. 

Do I Have To Pay Back the ERC?

Unlike the Paycheck Protection Program, the money received from the ERC is not a loan. Instead, it is a refundable tax credit that you can claim against employment taxes. Whatever refund you receive from the employee retention credit, you get to keep and use as you see fit. 

How Long Does It Take To Receive the ERC Refund?

The time to receive your ERC refund depends on the IRS and your documents’ accuracy. As mentioned earlier, filling out the paperwork for the employee retention credit is quite complex as it asks for a good amount of information.

If you fail to report the correct information properly or you forget to provide some type of documentation, you can further delay the processing of your ERC claim. In general, it can take between three to twelve months to receive your credit, but you may be able to receive it sooner. 

Send In Your Amended 941X Form Today

Filling out the documents for employee retention credit owner wages can be tricky, especially if you aren’t sure if your wages even qualify for the credit. You can reach out to several different resources, such as reputable tax professionals and tax attorneys, who can help you sort through the paperwork on your behalf.

When you do this, you reduce the risk of delaying your ERC claim. Contact us if you need help filing your employee retention credit documents. Our team is here to answer any questions or concerns you may have about the process. 

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