Credit for S-Corp Owners With Employee Retention Credit
Businesses have faced a great deal of uncertainty in recent years, and with all the new legislation that has been passed, taxes can be a real headache. In the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which the government enacted in response to the COVID-19 pandemic, the employee retention credit (ERC) was first introduced. The ERC, a tax credit, was created to assist firms in continuing to pay their employees. The majority of companies, including S-corp with employees are eligible for the ERC. As long as they experienced some negative effects from the pandemic. But there are crucial standards and qualifications to be aware of.
Along with the proprietors of C corporations, the majority of their salaries are presumably ineligible, although there are several exceptions. The ERC’s procedures, company and wage eligibility standards, the qualifications of S corporation owners, and other advice for claiming the ERC are all covered in this handbook.
The Employee Retention Credit (ERC): What Is It?
For qualifying employers, the ERC was established by the CARES Act as a completely refundable tax credit. Its initial application period was from March 13, 2020, through December 31, 2020.
Businesses with employees were eligible if they had to partially or completely cease operations due to a government order. Or if their gross receipts were 50% lower than they were during the same quarter in 2019. The ERC for 2020 was set at 50% of qualifying wages, with a $10,000 annual cap per employee.
The ERC was enlarged by the American Rescue Plan Act of 2021 and other pieces of legislation. In 2021, the credit was raised to 70% of qualifying wages. And the annual cap was changed to $10,000 each quarter. The ERC yearly cap for each employee in 2021 has been raised to $28,000. To qualify, a quarter’s gross receipts needed to be 20% lower in 2021 than they were in the equivalent quarter in 2019.
The ERC for 2021 was then truncated by the Infrastructure Investment and Jobs Act. Ending on September 30, 2021, rather than the year’s conclusion. The ERC cap was raised to $21,000 per employee per year as a result, unless the company was a startup in recovery. A recovery startup is a company that launched after February 15, 2020, and has gross receipts of $1 million or less.
Qualifications for Reclaiming the ERC
Businesses must comply with the standards outlined above regarding a sizable drop in gross receipts or ceasing operations as a result of a government order. What other qualifications must you meet to use the employee retention credit?
Businesses of Any Size
Both small and large firms are allowed to apply for the ERC. All because the legislation did not specify a size restriction. However, there are notable distinctions in how these businesses are handled:
As long as the company has 100 or fewer full-time employees in 2020 and 500 or fewer full-time employees in 2021, all employee pay is eligible for the ERC.
Due to COVID-19, businesses with more than 100 full-time employees in 2020 and 500 full-time employees in 2021 may only deduct wages given to employees during non-working hours.
Type of Business
Companies in the private sector and tax-exempt organizations are eligible. Only if they satisfy the other conditions relating to shutdowns and gross receipt losses. Governmental organizations weren’t eligible in 2020, however, the 2021 legislation changed the qualifications such that some governmental employers could apply for the ERC.
To be eligible for the ERC, a firm must have at least one employee. People who work for themselves as sole owners, for instance, are not eligible since they are paid from business profits rather than wages.
As long as they satisfy the other standards for shutdowns and gross receipt losses, private-sector businesses and tax-exempt organizations are eligible. Legislation passed in 2021 expanded eligibility conditions. So that some governmental employers could claim the ERC even if government entities weren’t eligible in 2020.
S corporations may operate a little differently than other commercial entities. Identifying which earnings in an S corp are eligible for the ERC and which are not might be difficult. There are various instances where the ERC may apply to the wages of S corporation owners.
To ensure that you are eligible for the ERC, follow these steps:
1. You Have to Work for the Business
An S corporation’s shareholders must work for the business for their wages to qualify for the ERC. Employee shareholders who own less than 2% of the business may be eligible.
2. The Business Must Pay You
S corp owners must get compensation from the business. As well as record the income on their tax returns, to qualify.
3. You Can’t Be Related
Even if they work for the company, a majority owner’s relative’s wages are not subject to the ERC.
4. You Can’t Usually Own the Majority
The ERC on wages often cannot be claimed by the main owner of an S firm. The only exemption is if the individual has no living siblings, half-siblings, parents, grandparents, spouses, or other lineal descendants they don’t have any of this kin, the S corporation will be able to claim the ERC on their wages as well as the wages of their spouse.
5. You Meet the Requirements for Full-Time Status
Anyone who works at least 30 hours per week, or 130 hours per month, for the company is regarded by the IRS as a full-time employee. Only pay given to full-time workers is acceptable.
6. Wages Are FICA-Subject
The IRS can be a little bit more challenging for businesses that deal with tips. Some gratuities won’t qualify as wages under the ERC. To qualify, compensation must be subject to FICA taxes.
7. The Company’s Gross Receipts Saw a Significant Loss
For any employee pay to qualify, your S corporation must have seen a decline in gross receipts in 2020 or 2021. Or the company must have completely or partially shut down due to COVID-related governmental restrictions. For you to be eligible to claim the credit on wages earned during that time, a quarter in 2020 or 2021 must have seen 50% or 20% less, respectively.
Given all the guidelines the IRS has established, queries regarding qualifying wages are frequent. Don’t take a chance at error. S corporation owners should speak with an ERC expert who can clarify whether they qualify for the employee retention credit for 2020 or 2021.
To Claim the Employee Retention Credit for S Corp Owners, Contact Us
Wages of S corp owners may not be eligible for the ERC, however, there are some exceptions. To ensure you may claim the employee retention credit on your pay or your employees’ earnings, make sure you do a thorough analysis of your position. You should never pass up the ERC if you are eligible because it might mean tens of thousands of dollars for your company.
Today, the professionals at Your Part Time Accountant are prepared to guide you through these challenging standards. We familiarize ourselves with your business structure, walk you through all relevant legislation, and assist you in properly filing everything. On our website, you can even begin the application procedure.