Employee Retention Credit Qualifying Wages

Technical topics regarding tax preparation.
#1
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I have been researching and reading (and re-reading) the treatment of S corporation shareholder wages when it comes to the Employee Retention Credit. Is the employee/shareholder's payroll considered qualifying wages or not? Has anyone found a definitive answer regarding this situation? Thank you!
 

#2
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Owners comp does not qualify.
 

#3
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Owners comp does not qualify


Do you have a cite for this?
 

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#5
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Cares Act section 2301(e)
 

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Section 2301(e) of the CARES Act states that "rules similar to the rules of sections 51(i)(1) and 280C(a) of the Internal Revenue Code of 1986 shall apply." https://taxnews.ey.com/news/2020-1774-e ... %2C%202021.


Code section 51i(1) then provides:

Internal Revenue Code §51(i)
Current
History
51(i)(1)Related Individuals

No wages shall be taken into account under subsection (a) with respect to an individual who—

51(i)(1)(A)
Bears any of the relationships described in subparagraphs (A) through (G) of section 152(d)(2) to the taxpayer, or, if the taxpayer is a corporation, to an individual who owns, directly or indirectly, more than 50 percent in value of the outstanding stock of the corporation, or, if the taxpayer is an entity other than a corporation, to any individual who owns, directly or indirectly, more than 50 percent of the capital and profits interests in the entity (determined with the application of section 267(c)),

51(i)(1)(B)
If the taxpayer is an estate or trust, is a grantor, beneficiary, or fiduciary of the estate or trust, or is an individual who bears any of the relationships described in subparagraphs (A) through (G) of section 152(d)(2) to a grantor, beneficiary, or fiduciary of the estate or trust, or

51(i)(1)(C)
Is a dependent (described in section 152(d)(2)(H)) of the taxpayer, or, if the taxpayer is a corporation, of an individual described in subparagraph (A), or, if the taxpayer is an estate or trust, of a grantor, beneficiary, or fiduciary of the estate or trust.
 

#7
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Outstanding Terry! I did not think shareholder/employee wages qualified, but I’m grateful that you verified it. Thank you.
 

#8
lckent  
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I interpret section 51(i)(1)(A) as describing people who bear the relationships described in section 152(d)(2)to:
1. the taxpayer, if the taxpayer is an individual,
2. 50% owners of the taxpayer, if the taxpayer is a corporation or other entity,
3. grantors, beneficiaries & fiduciaries of the taxpayer, if the taxpayer is an estate or trust.

Where does it say that more than 50% owners' wages are not to be taken into account?
CPA, Retired
 

#9
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↑ this

Reading the code as posted by Terry might seem to include 50% owners, but it looks to me like it is only describing individuals related to them.

I'll admit that I am still not convinced one way or the other. Back in April I was convinced owner's wages didn't count. Then the last conversation came up and I began to doubt and leaned more the other way even though it didn't seem to make sense.

I also remember reading the IRS FAQ referencing related parties, and it definitely never said anything about the owners...only those related to the owners.
 

#10
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https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-determining-qualified-wages-faqs#determining-qualified-wages

59. Are wages paid by an employer to employees who are related individuals considered qualified wages?

No. Wages paid to related individuals, as defined by section 51(i)(1) of the Internal Revenue Code (the "Code"), are not taken into account for purposes of the Employee Retention Credit. A related individual is any employee who has of any of the following relationships to the employee's employer who is an individual:
•A child or a descendant of a child;
•A brother, sister, stepbrother, or stepsister;
•The father or mother, or an ancestor of either;
•A stepfather or stepmother;
•A niece or nephew;
•An aunt or uncle;
•A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

In addition, if the Eligible Employer is a corporation, then a related individual is any person that bears a relationship described above with an individual owning, directly or indirectly, more than 50 percent in value of the outstanding stock of the corporation.

If the Eligible Employer is an entity other than a corporation, then a related individual is any person that bears a relationship described above with an individual owning, directly or indirectly, more than 50 percent of the capital and profits interests in the entity.

If the Eligible Employer is an estate or trust, then a related individual includes a grantor, beneficiary, or fiduciary of the estate or trust, or any person that bears a relationship described above with an individual who is a grantor, beneficiary, or fiduciary of the estate or trust.
 

#11
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Still no mention of the employees owning more than 50% of the corporation...only those bearing a relationship described above...
 

#12
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Truly confusing! Frustrating when you just can’t find a definitive answer on what should be a simple question. Thanks to all who have tried to help.
 

#13
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Employee Retention Credit guidelines state "similar to" section 51(i)(1)(A) if that makes a difference?
 

#14
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There is a regulation too 1.51-1(e).


(e)Certain ineligible individuals
(1)Related individuals

For purposes of section 51(a), "qualified wages" does not include any amounts paid or incurred by a taxpayer to any of the following individuals:

(i)
An individual who is related (within the meaning of any of paragraphs (1) through (8) of section 152(a)) to the taxpayer;

(ii)
An individual who is a dependent (within the meaning of section 152(a)(9)) of the taxpayer;

(iii)
An individual who is related (within the meaning of any of paragraphs (1) through (8) of section 152(a)) to a shareholder who owns (within the meaning of section 267(c)) more than 50 percent in value of the outstanding stock of the taxpayer, if the taxpayer is a corporation;

(iv)
An individual who is a dependent (within the meaning of section 152(a)(9)) of a shareholder described in paragraph (e)(1)(iii) of this section;

(v)
An individual who is a grantor, beneficiary or fiduciary of the taxpayer, if the taxpayer is an estate or trust;

(vi)
An individual who is a dependent (within the meaning of section 152(a)(9)) of an individual described in paragraph (e)(1)(v) of this section; or

(vii)
An individual who is related (within the meaning of any of paragraphs (1) through (8) of section 152(a)) to an individual described in paragraph (e)(1)(v) of this section.
 

#15
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so for my understanding some believe that maybe the qualifying wages of the shareholder is ok, but the shareholder's son is not?
 

#16
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Whestsider wrote:Employee Retention Credit guidelines state "similar to" section 51(i)(1)(A) if that makes a difference?


That is a good point. This Code section 51 generally provided for a credit toward members of targeted groups. Like WOTC. Qualifying wages would count from the EEs start date. So an owner would usually be past that. Unless an owner started a business, was a targeted group, began paying wages to himself claiming the credit from day 1. Then of course it would need to be challenged and clarified. It appeas that there is only a bar against an owner claiming his relatives, so the owner wages are ok. That makes sense because otherwise, wiht the ERTC, owners will start putting their family on the payroll overnight.
 

#17
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I agree it is strange, but what you just mentioned is exactly what I was thinking this morning. The credit is okay for the owner because the assumption is they were already on payroll. But they don't want all the relatives getting thrown on to payroll just to grab the credit.

This is exactly what got me caught up back in April, and then again with Theresa's post earlier.
 

#18
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I agree with you now. It makes sense and the irs FAQ 59 is clear.
 

#19
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In yesterday's webinar with Tom Gorzynski, he covered this both in the webinar and in the Q&A section several times. The shareholder's wages and the spouse's wages are allowed for ERC, but not family member wages, i.e., children, aunts, uncles, cousins, grandparents, cats, dogs, etc.
 

#20
Nilodop  
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Even if the dog is in the AKC Working Group?
 

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