The Employee Retention Credit (ERC) is a tax credit available to employers who have been affected by the COVID-19 pandemic. It is designed to help employers keep their employees on payroll and cover certain expenses related to health plans. However, there are certain people who are excluded from the ERC. The ERC does not apply to individuals who own more than 50% of the outstanding shares of a business, or to entities that are not corporations.
If the majority owner of a business has any living family members, their salaries are not eligible for the ERC credit. This includes the minister's salary and stewardship allowance, which do not constitute salaries within the meaning of section 3121 (a) of the Internal Revenue Code (the Code). The ERC applies only to qualified wages paid to employees. An amount must constitute a salary within the meaning of section 3121 (a) of the Code (or must constitute qualified health plan expenses attributable to those salaries) in order to be eligible for the credit.
If an employer is an estate or trust, then a related person includes a grantor, beneficiary or trustee of the estate or trust, or any person who maintains a relationship with a person who is the grantor, beneficiary or trustee of the estate or trust. Qualified wages include qualified health plan expenses that are properly allocated to wages. If a single person owns more than 80 percent of the common shares of two different corporations, then any salary paid to that person is not eligible for the ERC credit. Similarly, if an employer is an estate or trust, then any salary paid to a related person is not eligible for the ERC credit.
Example 2 clarifies that a majority owner's salary eligibility for credit is determined by family ties in combination with majority ownership, not just by majority ownership, even if the family member does not work for the company. Employers can also treat all amounts paid to maintain group health plans (including any pre-tax wage reduction contributions from employees) as qualifying health plan expenses that can be allocated to salaries. Salaries paid in accordance with existing leave policies, which represent benefits accrued over a previous period in which employees provided services, are not considered qualifying wages for the ERC credit. Similarly, amounts paid to authorized real estate agents of real estate brokerage firms do not constitute wages within the meaning of section 3121 (a) of the Code and are therefore not eligible for the ERC credit.
Finally, if a company is eligible for the Shuttered Venue Operators Grant (SVOG), it can count any salary paid to eligible employees during an eligible calendar quarter as “qualifying salary” for the ERC credit. However, only amounts paid to employees for the time they did not provide services and at the rate of pay in effect before an increase would be considered qualified wages.
