ERTC for S Corp Owners Qualified?
The past few years have been uncertain times for business owners. The pandemic tested our commerce and financial systems to their limits, encouraging the government to introduce relief acts. Our focus is on Employee Retention Credit S Corp owner. This includes the Employee Retention Tax Credit (ERTC and ERC).
While these tax credits were not part of the original draft, revisions from 2020 to 2021 have allowed certain business owners to apply retroactively for credit.
This article will give you a breakdown of S corps, Employee Retention Credit, owner wages, and other important information about ERC for these business owners.
S Corp Fundamentals
An S corporation, is a business with a special tax status and pays according to Subchapter S of the IRS code, hence the name. Here the credits, taxable income, losses, and deductions go directly to the shareholders who pay tax.
To qualify as an S corporation, your business must fulfill the following conditions:
- Be a domestic business that is not an insurance company, a financial institute, or a domestic-international sales business
- Have allowable shareholders
- Have a maximum of 100 shareholders
- Have only one type of stock
Apart from the tax status and the above conditions, an S corporation is comparable to a standard corporation (also known as a C corp) in terms of filing documents, structure, and corporate formalities.
How does ERC Work With Corporations?
The Employee Retention Credit (ERC), also known as Employee Retention Tax Credit (ERTC), is a tax credit that allows certain corporate entities to receive a payroll tax refund on their employees’ payroll during the COVID-19 lockdowns. This included all businesses forced to close or partially close for health and safety reasons.
Introduced in 2020, the ERTC was part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Over the next year, it was amended and expanded multiple times through acts such as the ARPA, CAA, and the Infrastructure Bill. Noteworthy changes are listed below:
- The previous version defined the ERTC as a financial relief option against a Paycheck Protection Program PPP loan, so businesses had to choose between the two. One of the most significant amendments changed the status of the ERTC so those who had filed for a PPP loan could still claim ERTC. However, this excluded the employee wages already paid by the PPP.
- Businesses could show a minimum reduction in gross receipts instead of the 50% set for 2021.
- The quarterly max credit cap of $5,000 per employee was increased to $7,000 per qualified W-2 employee for 2021.
- The receipt date was extended to September 30, 2021, and claims could be claimed retroactively for up to three years.
- Businesses could also elect prior quarters for the next quarter.
- Employee limits were increased to include larger businesses that could now claim employee retention credit. Owner wages could also qualify under specified guidelines.
Even though the ERTC expired on October 1, 2021, these businesses still have time to claim the credit if they fall under the ERTC eligibility criteria, regardless of any growth post-pandemic shutdown. However, it will be limited to the employee wages of that time.
The current guidelines state the maximum available credit for 2020 is $5000 per employee per year, and for 2021, it is $7,000 per employee per quarter. This extends the filing deadline as late as November 2024.
ERTC Eligibility Criteria
Both large and small S corp and C corp businesses can qualify for ERTC on their employee’s wages, provided they fulfill the following eligibility criteria:
- Employee Count
- All employees count if your company has 100 or fewer employees on the payroll.
- Only full-time employees count if your company has 100 -500 employees.
- Only full-time employees who were not working during the pandemic count if your company has more than 500 employees on the payroll.
- Business Type
- Only private-sector companies
- Government and sole proprietors do not qualify
- Decrease in Gross Receipts
- For 2020 credit, your quarterly gross receipts for 2020 have decreased by at least 50% compared to the corresponding 2019 quarter.
- For 2021 credit, your quarterly gross receipts for 20201 have decreased by 20% compared to the corresponding 2019 quarter.
- Gross receipts do not exceed $1 million for a recovery startup that opened after February 15, 2020
ERTC for S Corp Owner Wages
As S corporations run differently from other types of business, it is harder to assess the wages that qualify for employee retention credit, owner’s wage included. In some cases, an owner’s pay does not qualify for ERTC, but you may be able to make a claim if you fulfill the following terms:
- Your employee count, business type, and decrease in gross receipts meet the ERTC criteria mentioned herein:
- Your business has more than one employee
- Your business is private and not a government entity
- Gross receipts 50% and 20% over 2020 and 2021, respectively
- You work for the company and own less than 2% of the shares.
- You are not related to the majority shareholder.
- You are not the majority shareholder unless you have no living siblings, ancestors, direct descendants, or spouse. If you don’t have any of these relations, their wages paid by the corporation may qualify for ERTC.
- You classify as a full-time employee by the IRS, which means you work at least 30 hours weekly or 130 hours monthly.
- Pay is subject to Federal Insurance Contributions Act (FICA) taxes.
How to Claim Employee Retention Credit
There is still time for S corp owners to claim ERTC retroactively as the statute of limitations was set three years from filing the original tax return. However, this is not a standard tax credit that counters your income taxes, so it is important to understand how it is issued.
As it decreases social security tax, you can either reduce your employment tax deposits or file a 941-X form with the IRS.
To ensure no objections to your claim, all qualifying employee wages must be reported correctly, including any relevant health insurance. This includes reporting credit amounts per quarter per employee and gross receipt reductions for 2020 and the first three quarters of 2021.
These will be used to determine the Employee Retention Credit S Corp owner. Owner wages for the same period need to be meticulously reported for 2020 and 2021, which have different calculations.
Finally, you need to understand there could be substantial delays in receiving this amount even if your paperwork is filed properly. The pandemic also negatively impacted the IRS, and with the high influx of retroactive employee retention claims, it is behind on requests.
Get Help With Federal Tax Credits ERC
There is not much more time to claim the Employee Retention Credit S Corp owner retroactively for your business, and we suggest getting the process started immediately.
There is no question that the policy guidelines are complicated, and there are many requirements your S corp must fulfill, from determining the qualifying wages to calculating the credit.
This is a challenging task where errors or irregular reporting can result in receiving less money than you are entitled to or, worse, having your claim denied. Working with a done-for-you service can make this process significantly simpler for you.
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We wish your business the greatest success in receiving the tax credit. If you need any help or have any questions, please feel free to contact us.