Employee Retention Credit: New IRS Guidance Creates Confusion for Business Owners


The IRS last week released further guidance on the Employee Retention Credit (ERC), which includes a controversial interpretation for when the wages paid to a majority owner of the business, as well as the owner’s spouse (if applicable), are to be treated as qualifying wages.

The ERC was enacted as part of the CARES Act last spring to provide eligible businesses with relief due to COVID-19. Congress subsequently expanded eligibility, allowed the credit to be claimed alongside a Paycheck Protection Program loan, and extended the credit through the end of the year. It should be noted legislation recently passed by the Senate — and now pending in the House — would end the credit on Sept. 30 rather than Dec. 31, 2021.

Businesses whose operations were suspended by a government order because of COVID-19 or that experienced a significant decline in gross receipts may be eligible for the credit.

The new IRS guidance reflects the statutory requirement to apply rules similar to those within another tax credit, the Work Opportunity Credit (WOC). The WOC disqualifies wages paid to certain relatives of the majority owner, and it was commonly understood that wages paid to those relatives were therefore ineligible for the ERC as well.

In the guidance, the IRS confirms this view.

These relatives of the majority owner include:

  • 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
  • An individual (other than a spouse) who lives with the taxpayer and is a member of the taxpayer’s household

Not mentioned in the WOC is how to treat the wages paid to the majority owner or the owner’s spouse. The IRS has made a controversial determination that whether the majority owner’s wages and spouse’s wages are eligible should be based on whether the owner or spouse has certain living relatives — regardless of whether those relatives have anything to do with the business.

“In the event that the majority owner of a corporation has no brother or sister (whether by whole or half-blood), ancestor, or lineal descendant as defined in section 267(c)(4) of the Code, then neither the majority owner nor the spouse is a related individual within the meaning of section 51(i)(1) of the Code and the wages paid to the majority owner and/or the spouse are qualified wages for purposes of the employee retention credit, assuming the other requirements for qualified wages are satisfied,” the IRS stated.

Strangely, the IRS guidance would disqualify wages paid to the majority owner and the owner’s spouse if they have living direct relatives, but permit those with no such living relatives to include their wages when calculating the ERC. And this applies regardless of whether these relatives are involved in the business.

Congress certainly did not intend to draw a distinction between owners with living family members and those without.


NAHB strongly disagrees with the IRS’s interpretation and plans to request that it reconsiders this inexplicable conclusion. If you are affected by this interpretation, or have questions about the employee retention credit, NAHB recommends talking to a tax professional you trust.

NAHB members may contact J.P. Delmore and David Logan with any questions.

NAHB is providing this information for general information only. This information does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind nor should it be construed as such. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers.

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