When it comes to the Employee Retention Credit (ERC), the percentage of ownership matters. Self-employed workers who run a sole proprietorship do not qualify, since their income comes from the company's profits and not from the payroll. The IRS also examines the related individuals of the majority shareholders and their salaries to determine if the company can take advantage of the credit. An exception to this rule is constructive ownership because business partners are related.
A business owner can only own 50% or less and still not be eligible for the ERC credit. Under the law, eligible employers can apply for a refundable tax credit equivalent to 70% of the qualified wages they pay to their employees. Members of the tax community struggle with the “individual corporate owner” qualification to obtain the Employee Retention Credit (ERC). The credit has already been extended twice since it was first enacted, and many small business experts don't expect the federal government to extend the credit beyond this year. The IRS has finally released official guidance on the eligibility of salaries paid to business owners and their spouses to receive the Employee Retention Credit (ERC), and that's not good news for eligible employers. But before we get into the nitty-gritty of owner salaries and the employee retention credit, let's briefly recap shareholders and their salaries.
While an LLC offers some tax benefits for homeowners, this is a significant drawback with respect to the employee retention credit. Because the son is a relative of the owner, who exceeds 50%, his salary is not included in the employee retention credit. But what about shareholder salaries? Can you also apply for the landlord's wage credit? Learn about the salaries of the owners of the employee retention credit below. The employment withholding credit is immediate and is requested by reducing your company's payroll tax deposits before filing your quarterly payroll tax returns. The employee retention credit was designed to be a short-term solution to help business owners overcome the pandemic. The first version of the employee retention credit prohibited companies that borrowed money through the Small Business Administration's (SBA) Check Protection Program (PPP) from taking advantage of the ERC. The ERC is an important tax provision that provides a refundable tax credit equivalent to 70% of qualified wages paid to employees.
It has been extended twice since it was first enacted, but many small business experts don't expect it to be extended beyond this year. To be eligible for this credit, a company must have at least one employee, and majority shareholders must have salaries that are eligible for credit. If someone owns 50% and has a 50% business partner who is not related, then their salary may qualify for ERC. However, if a business owner owns more than 50%, then their salary may not be eligible for ERC. Additionally, members of related individuals may also be examined by IRS to determine eligibility for ERC.
Constructive ownership is an exception to this rule because business partners are related. It is important to note that companies that borrowed money through SBA's Check Protection Program are prohibited from taking advantage of ERC.