09 Sep Employee Retention Credit: New Guidance on Related Party Wages and Family Members
Newly issued Employee Retention Credit guidance regarding related party wages punishes owner-employees if they have living family members. Keep reading for the details and to find out what this may mean for you.
The Employee Retention Credit Guidance Notice
We have received clarification from IRS for Related Party Wages in the Employee Retention Credit Under IRS Notice 2021-49, issued on August 4th, 2021. Wages paid to a majority owner and/or owner’s spouse are NOT Eligible for the ERC unless they have no family due to attribution rules. The definition of family includes brothers or sisters (whether by whole or half-blood), ancestors, or lineal descendants.
Does the IRS consider wages paid by an employer to employees who are related individuals qualified wages?
No. The IRS does not take into account wages paid to related individuals for the purposes of the Employee Retention Credit. A related individual is an employee who has 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.
Additional considerations based on the business entity of the eligible employer
If the Eligible Employer is a corporation
The IRS defines a related individual as 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
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
A related individual includes a grantor, beneficiary, or fiduciary of the estate or trust. This also includes anyone that bears a relationship described above with a grantor, beneficiary, or fiduciary of the estate or trust.
What the guidance means
The IRS specifically addressed this issue in IRS Notice 2021-49. In summary, the notice says that if the majority owner has a brother or sister (by whole or half-blood), ancestor, or lineal descendant, wages paid to a majority owner or a majority owner’s spouse are not considered to be Qualified Wages. That means they are ineligible for the ERC.
In the event that the majority owner of a corporation has no brother or sister (whether by whole or half-blood), ancestor, or lineal descendant, then wages paid to a majority owner and the majority owner’s spouse are Qualified Wages and thus eligible for the ERC.
You read that right. If a majority owner of a corporation has any living family members, regardless of whether or not those members are employed by or owners of the corporation, then the wages paid to the owner are not eligible for the ERC. However, if the majority owner has no family then wages are eligible for the ERC.
It is a confusing two-step process. The rules say that relatives of owners listed above are attributed the same stock ownership as the owner. This applies whether the business employs them or not. Then there are cases where attribution to a non-working relative of the owner is more than 50% ownership. In that instance, the owner becomes a related party to the deemed owner (who is a more than 50% owner). This disqualifies the owner’s wages.
If you need guidance on the next steps you should take or have questions about the ERTC, we encourage you to reach out to our team at email@example.com for support.