Do Owner Employees Qualify for Employee Retention Credit?

The owners of an LLC are not eligible to receive the money from the Employee Retention Credit (ERC) because their salaries come from the company's profits, not from the payroll. However, thanks to the new IRS guidance, the salaries of small business owners can now qualify for the ERC. Whether wages paid to majority shareholders qualify for the ERC depends on the owner's participation, the relationship between shareholders and other factors. Constructive ownership means that family members of the majority owner of the business must also be considered constructive owners of the business.

This applies even if family members are not on the payroll. The problem here is that the landlord is also considered a member of the family and, therefore, his salary is disqualified. If a salary is greater than 50% of the owner and spouse, it may qualify for the ERC if the landlord has no siblings, ancestors, or children. In addition, an employee included for the purposes of the work opportunity tax credit under section 51 of the Internal Revenue Code cannot be included for the purposes of the employee retention credit.

If an eligible employer is an entity other than a corporation, then a related person is any person who maintains a relationship described above with a person who owns, directly or indirectly, more than 50 percent of the entity's equity and profits. Qualified wages include the qualifying employer's qualified health plan expenses that are properly allocated to wages. An eligible employer may use any reasonable method to determine the number of hours that a salaried employee does not provide services, but for which they receive a wage equal to their normal wage or at a reduced wage. Payments made in connection with the termination of a former employee's employment relationship are not qualifying wages because they are payments from a previous employment relationship and, therefore, cannot be attributed to the time during which the employee retention credit can be requested. The owners of an LLC are not considered employees and do not receive salaries because, as sole proprietors, they simply extract funds from the company's expected profits.

According to the IRS, a full-time employee is someone who works at least 30 hours a week or at least 130 hours a month. Eligible employers are entitled to an employee retention credit based on qualified wages paid to their employees. One of the most important tax provisions was the Employee Retention Credit (ERC), a refundable credit for businesses that encourages small businesses to keep their employees on payroll even if sales volume has fallen below what they would normally need to maintain those staff. For employees who are not providing services due to closure of their branch office but who receive 50 percent of their normal hourly wage, employers may treat those wages as qualifying wages for ERC. If you have family members who own your business, their salaries don't qualify for ERC. Because Kevin is related to an owner with more than 50% of property, his salary doesn't qualify either.

These amounts do not constitute wages within meaning of section 3121 (a) of Code and therefore are not qualifying wages for ERC. Sarah and Michael are employees of company and neither of them has family members who qualify under attribution rules. Employers O and P are corporations that have each issued single class of common stock and single person owns more than 80 percent of common shares of Employer O and Employer P.

Denise Lefler
Denise Lefler

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