Does the employee retention credit for S corp owners have any benefits? Most of their own wages are probably not eligible, along with those of C corporation owners, but it depends on several factors, and there are exceptions. This guide will walk through how the ERC works, business and wage eligibility requirements, how an S corporation owner can qualify, and other tips for claiming the ERC.
The last couple of years have created a great deal of uncertainty for businesses, and taxes can be a nightmare with all the new legislation introduced. The employee retention credit (ERC) was first initiated within the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in 2020, which the government created in response to the COVID-19 pandemic. The ERC, a tax credit, was meant to help employers so they could keep people on their payroll.
Most businesses with employees qualify for the ERC as long as they saw some negative impact of the pandemic, but there are important qualifications and requirements to be aware of.
What Is the Employee Retention Credit (ERC)?
The CARES Act created the ERC as a fully refundable tax credit for qualifying employers, and it initially covered March 13, 2020, to December 31, 2020.
Businesses with employees qualified as long as they had to partially or fully suspend operations because of a government order, or they had 50% less in gross receipts in a quarter compared to the same quarter in 2019. The ERC for 2020 was 50% of qualified wages, with a limit for each employee at $10,000 for all quarters.
The American Rescue Plan Act of 2021 and other legislation expanded the ERC. The credit increased to 70% of qualified wages in 2021, and the limit was raised to $10,000 per quarter instead of the whole year. The annual limit for the ERC in 2021 was increased to $28,000 per employee. Gross receipts just had to be 20% less in a 2021 quarter than the corresponding quarter in 2019 to qualify.
The Infrastructure Investment and Jobs Act then shortened the ERC for 2021, ending it on September 30, 2021, rather than the end of the year. This changed the ERC limit to 21,000 per employee per year unless the business was a recovery startup business. A recovery startup is a business that started after February 15, 2020, and has $1 million or less in gross receipts.
Eligibility Requirements for Claiming the ERC
Businesses must meet the requirements mentioned above regarding a significant loss in gross receipts or suspending operations because of a government order. What are the other qualification requirements to take the employee retention credit?
Employers of Any Size
The legislation did not indicate a size limit to be eligible for the ERC, so both small and large businesses can claim it. There are some differences in how these businesses are treated, however:
Private-sector companies and tax-exempt organizations qualify as long as they meet the other requirements regarding shutdowns and gross receipt losses. Government agencies didn’t qualify in 2020, but the 2021 legislation expanded requirements to allow certain governmental employers to claim the ERC.
A business must have at least one employee to qualify for the ERC. Self-employed people running a sole proprietorship don’t qualify, for example, since their income is from the business profits and not payroll.
Wages paid by an employer to employees who are related to them do not qualify for the employee retention credit, including children, siblings, parents, nieces and nephews, aunts and uncles, and in-laws.
Wage Qualification Requirements
Wages paid to employees that are subject to FICA taxes are eligible for the ERC. Some health expenses may qualify as well.
The requirements to claim the ERC can get complicated fast. Work with an ERC expert to determine what wages qualify for the credit.
How to Qualify for the ERC as an S Corp Owner
S corporations can run a bit differently than other types of businesses. It isn’t always easy to determine which wages qualify for the ERC in an S corp and which don’t. S corporation owners’ wages typically do not qualify for the ERC, but there are some exceptions. Here are some steps you can take to make sure you qualify for the ERC:
1. You Must Work for the Company
Shareholders of an S corporation must also work for the company for their wages to be eligible for the ERC. Any shareholder who owns less than 2% of the company and is an employee may qualify.
2. You Must Be Paid by the Company
S corporation owners must also be paid by the company and report the income on their personal tax returns to be eligible.
3. You Can’t Be Related
The ERC is not available on wages paid to anyone related to the majority owner, even if they work for the business.
4. You (Usually) Can’t Be the Majority Owner
The majority owner of an S corporation usually cannot claim the ERC on their wages. The exception is if that person has no living brother, sister, half-sibling, ancestor, spouse, or other lineal descendants. If they do not have any of these relatives, their wages and their spouse’s wages paid by the S corporation will qualify for the ERC.
5. You Meet Full-Time Status Requirements
The IRS considers a full-time employee someone who works at least 30 hours a week or 130 hours per month for the company. Only wages paid to full-time employees qualify.
6. Wages Are Subject to FICA
Businesses that deal with tips can be a bit trickier with the IRS. Some tips won’t count as qualified wages for the ERC. Compensation has to be subject to FICA taxes to be eligible.
7. The Business Saw a Significant Loss in Gross Receipts
Your S corporation must have seen a loss in gross receipts in 2020 or 2021 for any employee wages to qualify, or the business must have been fully or partially shut down because of COVID-related government restrictions. A quarter in 2020 or 2021 must have seen 50% or 20% less, respectively, for you to be able to claim the credit on wages paid during that period.
Questions about qualified wages are common, considering all the requirements the IRS has put in place. Don’t risk making a mistake. Contact an ERC professional who can explain whether you can claim the employee retention credit for 2020 or 2021 as an S corporation owner.
Other Tips for the Employee Retention Credit for S Corp Owners
Your first step in claiming the ERC is making sure your business meets all requirements, and you have qualified wages to report. There are several other considerations you need to walk through when starting the process. Here are a few tips when you’re ready to move forward:
- Claim the ERC retroactively: The ERC ended in 2021, but you can still claim it if you’re eligible and didn’t do it yet. You can use Form 941-X, the amended version, to claim the credit for 2020 or 2021. You have three years from the date of the original tax return filing to claim the ERC.
- Understand how it’s issued: The ERC isn’t a typical tax credit that offsets your income taxes. It lowers your Social Security taxes, so you can either reduce the deposits you make for employment tax or file Form 941-X, and the IRS will send you the credit amount.
- Claim the ERC even if you got a PPP loan: The ERC guidelines initially restricted businesses that also got a PPP loan. Legislation from 2021 then changed this detail, and you can claim the ERC even if you got a PPP loan, as long as you meet other qualification requirements. You just can’t claim the same wages paid by the PPP income.
- Expect delays in getting the credit: The COVID-19 pandemic negatively impacted all types of businesses, which is why the ERC exists in the first place. The IRS is no exception, and thus the organization has been behind on processing forms and requests. The agency has cited changing COVID-19 protocols and a higher volume of refund requests as reasons for delays related to the employee retention credit.
- Make sure you report wages correctly: The ERC has very complicated requirements, including which quarters qualify, percentage reductions in gross receipts, business shutdown requirements, and types of wages that are covered. Make sure you carefully examine the requirements and guidelines so you can accurately report your credit amount to the IRS. Otherwise, you may experience more delays or roadblocks in getting your credit.
- Submit a tax return amendment if you make a mistake: Making a mistake, like including a majority owner’s wages that don’t qualify, is quite common. You simply need to submit an amendment to your tax return if you notice that you miscalculated something. It’s also wise to talk to a tax professional if you uncover an error.
- Understand how 2020 differs from 2021: The ERC is made more complicated by legislation changing the terms for 2021. Get to know all applicable laws for the year at hand, including the CARES Act, Consolidated Appropriations Act (CAA), American Rescue Plan Act, and other COVID-related legislation. You may qualify for a larger credit in 2021, but the program ended for most businesses on September 30, 2021.
- Learn the credit maximums: The maximum credit for 2020 per employee is $5,000 for the year, and for 2021, the maximum credit is $7,000 per employee per quarter.
Claiming the ERC as an S corporation owner doesn’t have to be challenging when you understand the laws and are certain that your wages qualify. It also helps to contact an employee retention credit expert to walk through your situation with you and help you determine whether you are eligible.
Contact ERC Today for Help with Claiming the Employee Retention Credit for S Corp Owners
S corporation owner wages may not qualify for the ERC, but certain exceptions do apply. Make sure you thoroughly research your situation to ensure you can claim the employee retention credit on your wages or your employees’ wages. The ERC can mean tens of thousands of dollars for your business, so you never want to miss out on this tax break if you qualify.
The experts at ERC today are ready to help you navigate these complex requirements. We walk you through all applicable laws, get to know your business structure, and help you file everything properly. You can even start your application process online on our website.