What Is the 59/15 Rule for the Employee Retention Credit?
Explore the 59/15 safe harbor, an IRS provision that uses specific family attribution rules to decide if an owner's wages qualify for the ERC.
The Employee Retention Credit (ERC) was a COVID-19 relief program with a specific safe harbor, informally called the “59/15 rule,” that created a narrow pathway for some business owners to have their wages included in the credit calculation. This provision was a targeted exception for specific ownership structures. It addressed situations where an owner, due to a complete lack of certain relatives, did not have their ownership constructively attributed to others.
Conditions for the Safe Harbor
To use this safe harbor, a majority business owner had to satisfy two conditions. The first was that the owner could not have any living relatives as defined by attribution rules, including:
- A spouse
- Ancestors, such as parents or grandparents
- Lineal descendants, like children or grandchildren
- Siblings, whether of whole or half-blood
The second condition required that no portion of the owner’s stock ownership could be attributed to them from a related party, such as a trust or estate. Both tests had to be met, as the safe harbor could not be applied if the owner had even one of the specified relatives or attributed ownership.
The IRS established these clear boundaries to prevent abuse of the credit. The burden of proof rested on the business owner to document that they met these criteria before their wages could be considered eligible under this provision.
Applying the Rule to the ERC
When a majority owner met both conditions of the safe harbor, their wages could be classified as “qualified wages” for the Employee Retention Credit calculation. Increasing the pool of qualified wages increased the potential credit, which was calculated as a percentage of those wages.
The practical effect was a larger refundable tax credit for the employer. For 2021, the credit was calculated as 70% of qualified wages, up to $10,000 per employee per quarter. However, for most businesses, the credit was only available for the first three quarters of 2021. Including an owner’s wages could have added a significant amount to the claim, leading to a more substantial tax refund. This application was the sole consequence of meeting the rule; it did not alter any other aspect of the ERC eligibility for the business itself, which still had to meet the primary requirements like a suspension of operations or a decline in gross receipts.
The End of the ERC Program
The ERC was a temporary relief measure for wages paid between March 13, 2020, and September 30, 2021, for most employers. The deadline for businesses to retroactively claim the credit for 2021 wages by filing an amended payroll tax return has passed. In September 2023, the IRS announced a moratorium on processing new ERC claims to address a surge in fraudulent filings, causing significant delays for legitimate claims.