Related Individuals and the Employee Retention Credit
The Employee Retention Credit (ERC), a payroll-based tax credit, has been a boon to local businesses searching for additional funding alternatives during the COVID-19 pandemic by providing an immediate savings opportunity for companies that experienced a decline in gross receipts in 2020 and/or 2021. As we previously blogged about, the IRS issued Notice 2021-49 on August 4, 2021, which included guidance on claiming the credit after July 1, 2021.
The Notice contains a provision concerning related individuals, of which many companies may not be aware. Essentially, if any of the company employees are family members of the majority owner, their wages do not qualify for the ERC like the wages of other non-related company employees. In addition, wages paid to any individual who bears certain relationships to the following cannot be considered for purposes of the ERC:
- The taxpayer
- If the taxpayer is a corporation, wages paid to an individual who owns, directly or indirectly, more than 50% in value of the outstanding stock of a corporation (considered a majority owner of a corporation)
- If the taxpayer is another type of entity, wages paid to any individual who owns, directly or indirectly, more than 50% of the capital and profits interests in the entity (considered a majority owner of a noncorporate entity)
Wages paid to employees with the following relationships to the majority owner of a corporation, partnership, or other entity do not qualify for the ERC:
- Child or a descendant of a child
- Brother, sister, stepbrother, or stepsister
- Father or mother, or ancestor of either
- Stepfather or stepmother
- Niece or nephew
- Aunt or uncle
- Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
- An individual (other than a spouse) who for the taxable year of the taxpayer has the same principal place of abode as the taxpayer and is a member of that household
The constructive ownership of stock rules applies in determining whether an individual has constructive ownership of stock of a corporation and whether an individual is considered a majority owner of a corporation.
The provisions in the notice are complex and need to be evaluated on a case-by-case basis. However, the implications of this notice are that many small family-owned and operated businesses will be limited in the amount of the ERC that they can claim in any given quarter.
On November 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act into law, which terminates the ERC for periods after September 30, 2021, a full quarter earlier than initially anticipated.
Contact Us
If you have questions about the material outlined above or would like to learn more about how Klatzkin can help you claim the ERC, click here to contact us. We look forward to speaking with you soon.
©2021 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date. The content is provided for informational purposes only and does not constitute accounting, tax, or financial advice. Please consult your advisor concerning your specific situation.