IRS answers some Employee Retention Credit questions - Spidell

IRS answers some Employee Retention Credit questions


The IRS has confirmed that wages paid to majority shareholders do not qualify for the Employee Retention Credit (ERC), but only if those shareholders have specified relatives.

This is an issue that has caused much debate among tax commentators over the last year. And this unexpected guidance has provided an unexpected answer.

IRC §3134(e) specifically states that wages paid to “related individuals” are not qualified wages for purposes of the ERC. Note: For purposes of the ERC, a spouse is not a “related individual.”

The issue that has been debated is whether a majority owner of a corporation would be treated as a related individual.

In Notice 2021-49, the IRS states that a majority owner of a corporation is a “related individual” for purposes of the ERC, but only if the majority owner has a specified relative under the IRC §267 attribution rules: a brother or sister (whether by whole or half-blood), ancestor, or lineal descendant. This is true even if that relative is not an owner or an employee of the corporation.

However, if the majority owner has none of the specified relatives, the wages paid to that owner do qualify for the credit. If this guidance seems baffling to you, you are not alone. Let’s review two examples from the notice to clarify the rules.

XYZ Corp. is owned 100% by Greg. Greg has one son, Harry, who is not employed by the corporation, and has no ownership interest in the corporation. XYZ pays wages to Greg. Under the attribution rules of IRC §267(c), Greg’s son Harry is attributed 100% ownership of XYZ, and both Greg and Harry are treated as 100% owners. As a result, wages paid to Greg are not qualified wages for purposes of the ERC.

ABC Corp. is owned 100% by Jack. Jack is married to Karen, and they have no other family members as defined in IRC §267(c)(4). Jack and Karen are both employees of ABC. Under the attribution rules of IRC §267(c), Karen is attributed 100% ownership of ABC, and both Jack and Karen are treated as 100% owners. However, Jack and Karen are not considered “related individuals.” As a result, wages paid to Jack and Karen are qualified wages for purposes of the ERC.

Other questions answered in the Notice include:

  • If a taxpayer files an amended 2020 Form 941X to retroactively claim the ERC, the taxpayer must file an amended 2020 return or administrative adjustment request (AAR) to reduce the wage expenses claimed;
  • Taxpayers may claim both the ERC and the IRC §45B Employer Tax Credit for FICA paid on tip income; and
  • Employers who elect to use the alternative quarter election for purposes of the gross receipts test are not required to use that election for all quarters.

The Notice does not address whether forgiven PPP loan amounts are included in a taxpayer’s gross receipts for purposes of determining whether the ERC gross receipts reduction threshold is met. This remains an open question.

IRS Notice 2019-49 is available at:

www.irs.gov/pub/irs-drop/n-21-49.pdf