The Employee Retention Tax Credit can be lucrative for any business owner, including S Corp owners. However, they must meet the specific criteria outlined by the IRS. S Corporations who do not meet all the ERC requirements should not apply. If they have already done so, the IRS could refer the application for audit. Qualifying S Corporations waiting on their ERC tax credit could experience an even longer processing time than usual during the IRS’ moratorium period.
What Is an S Corporation?
S corporations are corporations that can pass corporate income, losses, deductions, and credits through to shareholders for federal tax purposes. These shareholders report the corporate income, losses, deductions, and credits on their personal tax returns, helping S corporations avoid getting double taxed for corporate income. Not all S corporations qualify for the Employee Retention Tax Credit. Those who do should consult with an ERC specialist, as qualified wages for an S Corp can be tricky to handle when applying for the refundable tax credit.
Do S Corp Owners Qualify for ERC?
Not all S Corporations qualify for the ERC tax credit. Those that do should seek the help of an ERC consultant to determine qualified wages. To qualify for the ERC tax credit, S Corporations can only use wages for employees who are:
Not related to the majority business owner
Employed by the company applying for the ERC tax credit
Paid wages reported on personal income tax returns during the 2020 or 2021 tax year
Meet full-time requirements of working at least 30 hours a week or 130 hours per month
Are not the majority owners (in most cases)
Compensated through wages subject to FICA taxes
Employees who work for the S Corp business owner do not count towards the ERC tax credit, even if they work for the company. If the majority owner does not have lineal descendants, living spouse, or siblings, their wages may count towards eligibility. Always consult with an ERC specialist if you are concerned about which wages qualify you for the ERC tax credit.
S Corp Tax Benefits Through ERC
The ERC tax credit provides significant tax benefits to those who qualify. It is a refundable credit, meaning that business owners who earn more from their ERC application than they owed in taxes for that tax year will receive the rest as a refundable tax credit. This allows them to spend the rest of the tax credit however they choose. There are no restrictions as to how a business owner can use the ERC tax refund.
S corporations who qualify for the ERC tax credit reduce their payroll taxes upon approval. The ERC tax credit is designed to help businesses recover financially from losses sustained during the COVID-19 pandemic. Reducing taxes from the 2020 and 2021 tax year through the ERC tax credit can help S corporations save money or cover other business expenses as they work towards becoming more financially stable post-pandemic.
S Corp Owner Wages and ERC
For S Corps, determining qualified wages is a bit trickier. Shareholders of an S Corporation need to also work for the corporation in order to count towards qualified wages. In addition, shareholders must own no more than 2% of the company to qualify. Without both of these criteria, S Corps are not fully eligible to apply for the ERC credit and could risk an audit from the IRS if they apply. With the IRS cracking down on false ERC claims, it is safest to consult with a certified ERC specialist about your application.
ERC Tips for S Corporation Owners
If you are an S Corp owner looking for guidance on the Employee Retention Credit, here are a few tips to help you further understand the application and approval process:
Processing times could be longer than expected. Due to the IRS recent moratorium for ERC applications, S Corp owners could experience even longer processing delays before receiving their ERC refund.
Businesses with PPP loans could still receive the ERC tax credit. However, businesses cannot use the same wages used to apply for PPP towards the ERC tax credit.
Only work with a certified ERC specialist. The IRS recent pause was used to help combat surges in false claims. There are plenty of ERC mills trying to scam businesses who do not fully qualify. Your ERC specialist should be a certified tax professional to help you apply.
Never pay high upfront fees to an ERC specialist. Some ERC scams charge businesses hefty upfront fees to send their application to the IRS. Five Star ERC Experts has always used a compliant fee service model that does not charge businesses upfront for an application.
Concerns about the status of your application with the IRS can be addressed by contacting either the IRS or your ERC specialist.