Are Owner-Employees Eligible for the ERC Tax Credit?

July 6, 2023
Dayes Law Firm

Business owners who kept workers on payroll during the COVID-19 pandemic while their company suffered restrictions or a drop in revenue because of government mandates can often claim the ERC (Employee Retention Credit). This refundable tax credit gives eligible employers a significant financial boost.

What about the ERC tax credit for owner-employees? Does your paycheck count as qualified wages for ERC purposes? The answer may surprise you. 

Owner Wages May Not be Eligible 

With some exceptions, the wages of majority owners (i.e., those who have a 50% or greater share of the business) are not eligible for the ERC tax credit. This is true whether you own the business directly or indirectly (e.g., you’re a major shareholder in another company that owns the business).

An Exception to the Majority Owner Rule

There is one exception to ERC eligibility for majority owners: You may be able to claim the ERC if you have no living siblings, parents, lineal descendants, or other family members who could share your majority owner status through indirect ownership.

For instance, Susan owns 85% of Company X and receives wages from the company. Susan has no living relatives who could be majority owners by extension. Under these circumstances, Susan’s wages qualify for the ERC benefit. 

What if You Own 50% or Less of the Business?

If you’re a shareholder who owns less than 50% of a business and also an employee in the same business, you may be able to claim the ERC tax credit for owner-employees. However, keep in mind that if some of the other shareholders are your family members, according to IRS attribution rules, this counts as indirect ownership and may change your status to that of a majority shareholder. 

These family members include:

  • Spouses
  • Children, stepchildren, and grandchildren
  • Siblings and stepsiblings 
  • Parents and stepparents
  • Nephews and nieces
  • Uncles and aunts
  • In-laws (e.g., son- or daughter-in-law, sister- or brother-in-law, father- or mother-in-law)

Wages vs. Profit Distributions

What if your business is an S corp and you’re a minority shareholder who receives both wages and distributions from the company’s profits? Do distributions work the same as qualified wages for ERC purposes?

Since distributions don’t appear on quarterly payroll reports or count toward payroll taxes, these profits aren’t wages and are ineligible for the ERC benefit. You can only claim the ERC on wages you receive as a worker (including salary, health benefits, paid vacations, etc.).

Bottom Line: Know Your Qualified Wages Before You File a Claim

ERC regulations, in general, and rules for owner-employees, in particular, can be tricky. Many honest business owners who applied for this valuable tax benefit inadvertently triggered an IRS audit because they didn’t fully understand the ERC rules. 

To avoid delays, audits, or penalties, we highly recommend working with a competent tax lawyer who will guide you through the filing process and ensure you only include qualified wages in your claim. 

If you haven’t claimed your ERC benefit yet, it’s time to do so before the deadlines pass. You have until April 15, 2024, to claim this tax break for 2020, and until April 15, 2025, to claim for 2021. 

Preparing To Claim the ERC Tax Credit in Phoenix, AZ? Contact Dayes Law Firm

Are you planning to claim the ERC benefit? Not sure how the ERC tax credit for owner-employees works? Contact us at Dayes Law Firm for reliable legal guidance. Our seasoned tax attorneys will evaluate your ERC eligibility to ensure your claim complies with all IRS requirements and deadlines.

Call 800-503-2000 for a free consultation today.