So are family members eligible for ERC? The short answer is many businesses can claim ERC family members. It primarily comes down to ownership and the percentage the family member holds.
ERC Family Members Qualify Confusion
This was already a confusing subject but on 4th of August 2022 there was a distressing and confusing notice from the IRS. It was particularly alarming for family-owned and operated businesses that had been working under the old regulations for some time. The notice revealed the Employee Retention Credit did not apply to family members.
This was further elaborated with the listing of categories that could not avail of this Employee Retention Credit. It included wages paid to majority owners, spouses, siblings, step-siblings, and other blood relatives. It also revealed that if the majority owner had no blood relatives, they and their spouse could qualify for the ERC.
This posed a major problem. Firstly, business owners that were in major need of finances and had families to support could not opt for Employee Retention Credit on their wages. Secondly, it became harder to calculate the Employee Retention Credit. Family members’ wages complicated the calculations.
The following sections attempt to elaborate upon this notice and reveal some key considerations that can help you calculate your Employee Retention Credit.
Main Focus of the Employee Retention Credit Program
The Employee Retention Credit came at a time when business owners suffered the most from the pandemic’s effects. This included not being able to retain employees simply because the cost of retaining them was much more than the benefit.
This pushed the IRS to introduce the CARES act in 2020, which took care of businesses and employees during the pandemic. It gave business owners the stability they needed to get through the tough times. Most of the benefits were received by the business recovery startups which needed this lifeboat the most.
ERC in a Nutshell
The Employee Retention Credit is allotted to employers who managed to retain a percentage of their workforce during the pandemic. It provides a credit that fulfills payroll tax requirements. The remaining amount is refundable (apart from the non-refundable amounts).
A business can still avail of Employee Retention Credit despite the discontinuation. All you must do is fill out the updated Form 941-X and compare it with your previous information in Form 941. The errors must be fixed. This is then submitted to the IRS.
What Businesses can Apply for the Employee Retention Credit
Not everyone is eligible for the ERTC. Family members can’t take advantage of the credit after the updated policies. However, your business is eligible if you meet the following requirements;
- Closure – If your business has closed down during the pandemic (2020-2021) due to government orders, you are eligible for the credit.
- Profits – If your business has suffered a major loss due to the pandemic, or a decline in profits compared to the previous years, you can qualify.
- Supply Chain Issues – If you had any trouble getting supplies or there weren’t a reasonable replacement, your business is eligible.
Before you apply, keep in mind that businesses that failed to retain a certain percentage of their employees during the pandemic will not be able to qualify. The best way to approach the Employee Retention Credit application is by contacting a professional that can guide you through the complicated process.
Update to the Employee Retention Credit: Family Members Exempted
There has been a considerable uproar regarding the recent developments in the Employee Retention Credit criteria. The exemption of family members’ wages from the overall calculations did not make sense for many businesses in dire need of tax relief.
This made it even tougher to calculate the Employee Retention Credit you would receive or determine eligibility. It also meant that businesses had to postpone planning their tax requirements to a later date.
Relying on a professional to understand the Employee Retention Credit policies is the best way to receive the benefits of the ERTC.
Breakdown ERC Credit Family Members
The following list contains a list of employees whose wages do not qualify for the Employee Retention Credit;
- The majority owner
The majority owner’s wages will not be applied to the final calculations for the Employee Retention Credit if they own more than 50 percent of the corporation. This means that they own a majority of the business.
Remember that if the majority owner has no blood relatives, their wages are eligible for the Employee Retention Credit.
- The majority owner’s siblings (step-siblings included)
The majority owner’s siblings are exempted from the calculations since they are related to the majority owner directly. This means that they are considered indirect majority owners.
- Ancestors of the majority owner
- Lineal descendants of the majority owner
The same applies to both entities above. But the process of exempting members from the Employee Retention Credit doesn’t just end at the list above. There are many additional members that might not qualify.
These include grandparents, mothers and fathers-in-law, sisters and brothers-in-law, and more. This complicated list is best understood by an experienced professional.
- Spouse of the majority owner (in case the majority owner has blood relatives)
Keep in mind that in case the majority owner has no blood relatives, the spouse’s wages can qualify.
This poses a great problem. It is hard to calculate the Employee Retention Credit in normal circumstances. Add to that the complication of the family members and subsequent exemptions, and it quickly gets too hard to manage!
ERTC: Family Members and Calculations
So, we know that the owner’s wages don’t count if the majority owner has blood relatives employed at the business. This rule has no loopholes, and we must follow it as closely as possible. Calculating Employee Retention Credit can get harder as more technicalities get added to the mix.
Since the IRS considers employed relatives as majority owners by the rules of family attribution, it doesn’t consider the wages of those members. The best way to explain the calculation is through some real examples inspired by the IRS instructions.
Employee Retention Credit for Family Members Examples
- Consider Firm A, which is owned by a mother with 100% ownership. She and her daughter are the only employees of the same firm.
By the law of family attribution, the daughter also has 100% ownership as it is attributed to her by her mother. Since she owns more than 50% of the firm, she is disqualified. However, in the mother’s case, the scenario gets complicated. Since owners can’t be disqualified in the same manner, we must refer to the daughter’s attribution. Through her, the mother is an indirect owner of the 100%. This gets her wages disqualified too.
- Consider Firm B, owned by a brother and sister. Both own 50% of the firm and are the only employees.
Individually, the brother and sister’s wages do not disqualify. However, they both end up owning 100% of the firm through attribution. Both of their 50% attribute to the other and thus lead to them being 100% owners.
- Consider a much more complicated Firm C setup. This one is owned by three cousins, X, Y, and Z, owning 30%, 40%, and 30%, respectively. They are also employed at the firm. The firm also has a fourth employee, their grandfather.
Family attribution does not apply to cousins. However, it does apply to the grandmother. Since ownership extends to ancestors, the grandmother is an indirect 100% owner as she attributes the 30%, 40%, and 30% owned by X, Y, and Z, respectively.
Attribution laws are quite complicated, and it is best to rely on a professional who can walk you through the tougher calculations.
Why You Need an Employee Retention Credit Expert
If you are wondering whether you should hire an expert to help you apply for Employee Retention Credit, you are on the right track. The rules keep changing, and sooner or later, you might encounter a hurdle in the calculations.
Working with ERC experts who have prepared 941-X forms for many big businesses can get you a much better understanding of your eligibility. It can also get you more credits and help you finalize the process more quickly.
Confused About the ERTC Family Members Attribution Laws?
With years of experience with ERC law and payroll analysis, we have managed to master the ERTC filing process. If you are looking for a smoother road to gaining ERC benefits, Federal Tax Credits ERC can get those calculations done for you.
To determine your eligibility, fill out this quick form and get your Employee Retention Tax Credits as soon as possible. During the pandemic, business owners need all the help they can get. The sooner you apply, the easier it will be to get to the other side.
Keep in mind that family attribution laws can be tough to understand. Shift the burden to our ERTC experts and get to the important decisions today.
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