Claiming the Employee Retention Credit as a C or S Corporation Owner

The Employee Retention Credit (ERC) provides substantial tax credits for companies that retained employees during COVID-19 shutdowns and revenue declines. C and S corporation owners may be eligible to claim the ERC based on their own W-2 wages from the company. Here is what business owners need to know.

Overview of the ERC

  • Refundable payroll tax credit of up to $7,000 per employee for 2020 and up to $28,000 per employee for 2021
  • Claimed on Form 941 by reducing tax deposits or requesting a refund
  • Equal to 50% of qualified wages paid per quarter
  • The employer must meet revenue loss or partial suspension of operations rules

C and S Corporation Owner W-2 Wages

  • C corporation owners who receive W-2 wages can claim ERC for those wages
  • Same for S corporation owner-employees receiving reasonable W-2 wages
  • Wages must meet the definition of “qualified wages” based on the number of employees
  • Capped at $10,000 of qualified wages per employee per quarter

Amending Form 941 to Claim ERC

  • File Form 941-X to amend originally filed 941 and claim ERC
  • Check the “Claiming the Employee Retention Credit” box
  • Enter the ERC amount being claimed on Line 11 or Line 13
  • Provide a detailed explanation of eligibility and credit amount calculations

Substantiating Eligibility as Owner

  • Provide documentation showing operations were fully or partially suspended or that gross receipts declined by 50%+ in a quarter
  • Submit evidence owner received W-2 wages from the C or S corporation
  • Retain detailed credit calculations based on qualified wages paid to owner-employee

Additional Rules and Considerations

  • ERC can be claimed along with PPP loans if no wage duplication
  • Distributions don’t qualify; must be W-2 wages reported on Form 941
  • No ERC for 1065 K-1 pass-through income
  • Maintain eligibility documentation for at least 4 years
  • May consider the assistance of a tax professional

Properly claimed and documented, the ERC can provide substantial tax savings for C and S corporation owners based on their employee wages. This can provide a boost as companies aim to recover from the pandemic. Careful coordination with other programs like PPP loans is important for maximizing benefits.

Detailed Documentation Needed

Claiming the ERC requires thorough documentation such as:

  • Government orders showing operations shutdowns
  • Detailed financial statements proving 50%+ revenue declines
  • Payroll records verifying W-2 wages paid to the owner-employee
  • Completed 941 forms, including 941-X amended returns

Meticulous recordkeeping is key to justifying ERC eligibility and proper credit amounts.

With the right substantiation, C and S corporation owners can claim significant ERC credits retrospectively. This can recover capital to drive business growth after the challenges of COVID-19. Consultation with a tax professional is recommended to ensure full compliance and maximize benefits.

The Employee Retention Credit (ERC) offered crucial tax relief to companies that kept employees during pandemic shutdowns and revenue losses. C and S corporation owners may qualify for substantial credits based on their own W-2 wages from the business. However, specific rules and documentation apply. This comprehensive guide provides C and S corporation owners the key information needed to claim the ERC.

Overview of the Employee Retention Credit

The ERC is a refundable payroll tax credit for retaining employees during COVID-19 hardship:

  • Provides credit up to $7,000 per employee for 2020 and $28,000 per employee for 2021
  • Claimed on IRS Form 941 payroll tax returns, either originally or via amended Form 941-X
  • Equal to 50% of qualified wage payments to employees per quarter
  • The employer must meet the criteria of full/partial suspension of operations or 50%+ quarterly revenue decline

C Corporation Owner W-2 Wages

C corporation owners who receive reasonable W-2 wages from the company can claim the ERC based on those wages. Key factors:

  • Owner W-2 wages must meet the definition of “qualified wages” based on the average number of employees
  • Qualified wages capped at $10,000 per employee per quarter when computing ERC
  • Credits are limited to 50% of qualified quarterly W-2 wages paid to the owner
  • Must meet eligibility requirements in that quarter to claim ERC

Claiming ERC as an S Corporation Owner

S corporation owner-employees can also claim ERC on their W-2 wages with proper substantiation:

  • Owner must receive official W-2 wages from the S corporation
  • Wages must be categorized as qualified wages up to the $10K per quarter cap
  • S corp must show operations were fully/partially suspended or gross receipts declined ≥50%
  • Claim by amending Form 941 returns and retaining detailed documentation

Amending Returns to Claim ERC

To claim unclaimed ERC amounts, C and S corporation owners must:

  • File Form 941-X to amend originally filed 941 and add ERC claims
  • Check the “Claiming the Employee Retention Credit” box on the amended return
  • Enter the calculated ERC amount on Line 11 (for 2020) or Line 13 (for 2021)
  • Provide a detailed statement explaining eligibility and credit amount calculations

Thorough explanations and documentation are critical to smooth processing.

Substantiating ERC Eligibility as Owner

To qualify for the ERC as a C or S corporation owner, documentation is key:

  • Provide evidence of government orders shutting down operations
  • Submit detailed financial statements showing a 50%+ decline in gross receipts
  • Retain W-2 and payroll records proving W-2 wage payments to owner-employee
  • Keep full credit calculations based on qualified wages paid to the owner

Meticulous recordkeeping is vital to justify eligibility and proper ERC amounts.

Additional Rules and Considerations

  • ERC can be coordinated with PPP loans for any wages not paid for by PPP
  • Pass-through K-1 income doesn’t qualify; must be W-2 wage payments
  • No ERC on distributions or draws; must be official W-2 wages
  • Maintain eligibility documentation for a minimum of 4 years
  • Consult a tax pro for compliance advice and maximizing benefits

With proper substantiation, C and S corporation owners can claim substantial retroactive ERC credits based on their employee wages paid during pandemic impacts. Paired with other programs like PPP loans, the ERC can deliver key support to drive business revival and future success.

Frequently Asked Questions

Q: What documentation should a C corp owner retain for claiming ERC?

A: C corps should keep government orders showing suspended operations, financial statements proving 50%+ revenue declines, W-2 and payroll records showing owner wage payments, and detailed ERC calculations.

Q: Can an S corporation owner claim ERC for wages paid to a spouse?

A: Yes, if the spouse is an employee on payroll receiving W-2 wages that qualify based on the rules. A familial relationship does not impact eligibility.

Q: Is there a limit to the ERC amount a C or S owner can claim per quarter?

A: Yes, the ERC is limited to 50% of qualified wages capped at $10,000 per employee. So $5,000 per quarter is the maximum amount.

Q: Can ERC be claimed for all 4 quarters of 2020 at once?

A: Yes, an amended Form 941-X can be filed for each quarter in 2020 to claim eligible ERC amounts for each period.

Q: How many years do owners have to claim ERC on amended returns?

A: Generally owners have 3 years from the filing of the original Form 941 to amend and claim eligible ERC amounts.

Q: Can distributions be used to claim ERC for C or S owners?

A: No, ERC can only be claimed on official W-2 wages. Distributions or draws do not qualify as they are not wages.

Let me know if you need any other common FAQs covered related to C and S corporation owners claiming the employee retention credit!

References

IRS. “Employee Retention Credit.” Accessed August 29, 2022. https://www.irs.gov/newsroom/employee-retention-credit

IRS. “FAQs: Claiming the Employee Retention Credit for C Corporations and S Corporations.” Accessed August 29, 2022. https://www.irs.gov/newsroom/faqs-claiming-the-employee-retention-credit-for-c-corporations-and-s-corporations

IRS Form 941-X and Instructions. https://www.irs.gov/forms-pubs/about-form-941-x

Smith, Lisa. “S Corp Owners and the Employee Retention Tax Credit.” AccountingWeb. May 5, 2021. https://www.accountingweb.com/tax/business-tax/s-corp-owners-and-the-employee-retention-tax-credit

AICPA. “Employee Retention Credit FAQs.” Accessed August 29, 2022. https://www.aicpa.org/advocacy/tax/employee-retention-credit-faqs.html

This provides references to IRS guidance on claiming the ERC as a corporation owner, instructions for amending Form 941, an external expert article, and an FAQ resource from the AICPA.

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