The Employee Retention Tax Credit (ERTC) has the potential to provide significant financial relief to small businesses offering up to $7,000 per employee, per quarter for qualified wages paid during 2021. NFIB has provided extensive educational material on the ERTC.
But there is one common ERTC question without an answer: whether corporation owner and spouse wages qualify? Unfortunately, there is not a definitive answer from the IRS on whether wages paid to owners of corporations or their spouses are “qualified wages” for purposes of the ERTC.
The ambiguity stems from IRS guidance Question 59, on the exclusion of “related individuals.”
#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.
Among CPAs and tax professionals, the competing interpretations include:
- Given the related individuals listed in Question 59, it does not make sense for an owner or spouse to have their wages qualify, but not have a son, daughter, or parent’s wages qualify. Therefore, the intent of the related individuals’ exclusion would exclude owner and spouse wages as well.
- The text of the guidance does not list owner wages or spouse wages. Because they are not included in the exclusion, the presumption is that they are not excluded and therefore do qualify.
AICPA has raised this issue with the IRS on several occasions and pushed them to issue clarification. AICPA Comments on the Employee Retention Credit (Page 2, Recommendation 2). AICPA has stated that formal guidance is needed to understand how the IRS will apply the ERTC to owners and their spouses.
NFIB will work to address this issue with the IRS and Congressional leaders, as we appreciate the uncertainty this is causing small business owners. Until further clarity comes, we recommend small businesses make their own decisions given all of the information available in consultation with their CPA or tax professional.