As we speak with hundreds of business owners every day, we often get asked whether their wages can qualify for Employee Retention Credits. Many small business owners pay themselves W-2 wages, and their wages are included in the payroll reports we gather as a part of our filing process. However, we exclude these wages because if they own 51% or more, owners’ wages (and the wages of their relatives) do not qualify for the ERC credit.
If someone owns 50% and has a 50% business partner and they are NOT related, in that case, their wages can qualify for the ERC credit. One exception to this rule is constructive ownership due to the business partners being related. A business owner may only own 50% or less and still not qualify for the ERC credit.
Example 1: If the business is owned 50% by the son & 50% by the father – both partners are considered 100% constructive owners because they are related. So in this case their wages and their relatives’ wages would not qualify for the ERC credit.
Example 2: If a company has 3 business partners and they’re all brothers – then they are all considered 100% constructive owners due to being related and their wages don’t qualify for the ERC credit.
Additionally, the wages of people related to business owners cannot be used for ERC credits. Wages paid to employees with the following relationships to a majority owner (or constructive majority owners) of a corporation or of a partnership or other entity are not qualified wages:
(A) A child or a descendant of a child.
(B) A brother, sister, stepbrother, or stepsister.
(C)The father or mother, or an ancestor of either.
(D)A stepfather or stepmother.
(E) A niece or nephew.
(F) An aunt or uncle.
(G) A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
(H) An individual who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household.
We know that these rules can be disappointing for people who employ family members. Here at ERC Specialists, we are careful to follow the rules outlined by the IRS for claiming the Employee Retention Credit. We look forward to the opportunity to serve you and your business with excellence.