The Employee Retention Credit has been a very valuable refundable credit for those businesses that were badly impacted by the Covid-19 pandemic. Congress has continued to extend and expand the credit through each of the Acts in response to the pandemic, making the credit more widely available for more businesses. However, recent guidance from the Internal Revenue Service has clarified what wages related to a majority owner are considered qualified wages, and their clarification hurts small businesses.
Through all previous guidance, it has been stated that wages for an individual who is related to a majority owner are not eligible to be included in the credit. This meant that wages to the child, sibling, parent, and other relatives of a 51% owner would be excluded from the credit, but did not disallow the owner’s wages from being qualified. IRS Notice 2021-49 has further clarified that, due to rules of attribution, if a majority owner just has a child that is not even an employee of the company, that majority owner’s wages are now disallowed from the credit. This means that if a business is owned by a married couple, and they are the only two employees, if they have a child or any other relative, they are not able to get the credit.
There has been much push back on this guidance and it will be something to keep a close eye on.
Scott Simpson is a Tax Manager at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.