We have our answer on whether or not shareholder wages count for the employee retention credit. The answer is: in most situations they will not count.
The latest guidance from the IRS, Notice 2021-49, lays out the rules.
The best way of looking at it is, if the shareholder has any living relatives (children, siblings, or parents), the shareholders wages won’t qualify for the ERC. This is true even if the relative doesn’t work in the business.
Example 1: Let’s use me as an example. I have a sister. She’s smart and wants nothing to do with taxes. She is certainly not my employee and has nothing to do with my business. However, under the ownership attribution rules in Section 267 of the tax code, she’s considered to be a 100% owner of my business. Her ownership then taints my ability to claim an ERC for myself. If my business qualified for the ERC, and I had other (non-relative) employees I could claim the ERC for those employees, but not for myself. Note that the existence of a spouse, in and of itself, DOES NOT taint an ERC claim. But the existence of relatives taints BOTH the shareholder and their spouse.
In this example, if we’re talking real-life, I’d be out of luck in multiple ways because my mother is still alive, and I have 2 kids. All of them are deemed to own 100% of my business, and that means I am out of luck on claiming the ERC.
Example 2: The only way shareholder wages work would be if the shareholder has no living ancestors. So their parents have passed away, and they have no children or siblings. In that situation only, the shareholder’s wages count for the ERC. In this situation, the shareholder COULD be married and their spouse A) would not taint the ERC claim for the shareholder; and B) if the spouse is an employee, the spouse’s wages would count for ERC also.
What About Spouses?
To clarify with spouses: the existence of a spouse is NOT a disqualifying relationship for ERC. However, your relationships with your relatives attach to your spouse and would disqualify your spouse too.
In Example 1, my relationship to my sister applies to my wife as well. So if my spouse were an employee, she’d be tainted by the related-party rules and so her wages wouldn’t count.
In Example 2, as said above, the existence of a spouse in and of itself is not a disqualifying relationship. If I have no living relatives, then I can be married and still have my wages count for ERC. And if my wife is an employee of my business, her wages would count for ERC also.