Do S Corporation Owners Qualify for the ERC?

July 18, 2023
Dayes Law Firm

If your business suffered because of operating restrictions during the COVID-19 pandemic but you kept paying your employees, you may qualify for the Employee Retention Credit (ERC). The ERC is a tax credit through which eligible employers could collect up to $7,000 per employee per calendar quarter. 

What if your business is an S corp and you’re one of the owners? Do S corp owners qualify for the ERC credit? 

S Corporations and ERC-Qualifying Wages

If you’re both an S corp shareholder and an employee with wages that go on payroll taxes, your salary and employee benefits typically won’t count toward an ERC claim. However, there are some exceptions to this rule. 

If you’re one of the business owners, the S corp may be able to claim the ERC benefit on your wages provided that:

  • You’re not a major shareholder (the wages of minor shareholders who own under 2% of the business usually qualify)
  • The S corp pays you a salary, which you report on your personal tax return
  • You aren’t related to the majority owner (relatives include parents, siblings, children, nieces, nephews, in-laws, and more)
  • You count as a full-time employee, meaning you work at least 30 hours/week or 130 hours/month for the business

What About Majority Owners?

Shareholders who own over 50% of S corps usually won’t be able to claim the ERC benefit on their wages, with one main exception: Majority S corp owners qualify for the ERC credit if they have no living parent, siblings, children, or any lineal descendant. Under these conditions, if the S corp pays wages to the majority owner and their spouse, these wages are eligible for the ERC. 

Did Your S Corporation Experience Disruptions or Losses?

Finally, your S corp will only be able to claim the ERC on employee wages, including owner wages, if your business saw a significant decline in gross receipts during the pandemic (15% for 2020 and 20% for 2021) or if COVID-related orders caused your business to suspend its operations fully or partially. 

Why It’s Vital To Report Wages Correctly on Your ERC Claim

The ERC tax benefit includes complex eligibility requirements. Many employers, including S corp owners, struggle to understand which wages qualify for the benefit, what counts as a significant reduction in gross receipts, and for which quarters they can claim the ERC. Moreover, fraudulent ERC filings sprang up all over the U.S., so the IRS works extra hard to weed out any incorrect, inflated, or ineligible claims.

You must ensure you provide detailed, accurate information in your claim. Otherwise, your business could face frustrating delays in collecting the ERC benefit, or worse, an IRS audit and potential penalties.

Working with an experienced, knowledgeable tax attorney will help ensure your ERC claim follows all IRS guidelines. If you discover you already made an error on your claim, your tax lawyer can help you file a tax return amendment and, if necessary, defend your business against an IRS audit. 

Dayes Law Firm: Helping You Navigate ERC Claims 

Do you have further questions on whether S corp owners qualify for the ERC credit? Are you preparing to claim the ERC benefit for your business but aren’t sure what counts as qualified wages? Contact Dayes Law Firm today. Our experienced, knowledgeable tax attorneys will help you determine eligibility for the ERC and verify that your claim fully complies with all IRS rules.

Be sure to claim your ERC benefits before the filing deadline passes. Call 800-503-2000 for a free consultation with a skilled tax lawyer in Phoenix, AZ.