Some government benefit initiatives extend to members of a family. For example, some spouses or dependent children of service members or veterans qualify for benefits like healthcare, life insurance or education assistance to help pay for school or training. Similarly, a special provision of the post-9/11 GI Bill enables some military members to share their remaining GI Bill (education) benefits with immediate family members.
The Employee Retention Tax Credit (ERC) has benefited many business owners. Unlike a loan, the ERC is a rebate that does not need to be paid back. That said, there are limits in this program for majority business owners and their family members. A majority owner is defined as any individual or company that owns or controls more than half of a company’s shares.
Under the Employee Retention Credit guidelines, wages paid to individuals who own more than 50% (majority owner) of the business are generally not counted as qualified for credit consideration. Similarly, wages paid to certain family members of the majority owner are generally not qualified. The IRS considers these family members to be constructive owners of the business and disqualifies their wages as if they were an owner themselves.
Who are Considered Family Members for Employee Retention Credit Purposes?
According to the Internal Revenue Service (IRS), wages paid to individuals who are related to a majority owner of the employer are not eligible for the retention credit. IRS guidance under Sec. 152(d)(2) defines related individuals for this purpose as:
- 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 an individual who at any time during the tax year was the spouse of the taxpayer) who, for the tax year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household.
What About Wages Paid to a Majority Owner and His/Her Spouse?
Recent guidance from the IRS on this issue came in August 2021. Notice 2021-49 states that wages paid to a majority owner and his or her spouse are generally not eligible for the Employee Retention Credit. Interestingly, if a majority owner has no siblings or lineal descendants, then neither the majority owner nor the spouse is considered a related individual for ERC purposes. Simply put, a majority owner may be eligible for this tax credit if he or she has no family.
Things to Consider When Calculating the Employee Retention Credit for Family Members
There are a few mistakes employers commonly make when calculating their Employee Retention Credit. Here are a few things to avoid when filing your claim:
- Failing to meet the qualifications of an eligible business under IRS employee retention credit guidelines.
- Including the wages of a non-qualifying majority owner.
- Including the wages of related individuals with whom the majority owner rarely has contact.
- Failing to correctly apply qualified wage limits per quarter or per year.
- Not considering previously filed Form 7200 to request an advance payment of employer credits due to COVID-19
- Not amending a previously filed retention credit claim when wages paid to a majority owner, or their family was inadvertently included in the calculation.
- Improperly including qualified sick leave wages and qualified family leave wages under sections 7001 and 7003 of the Families First Coronavirus Response Act as qualified wages for the Employee Retention Credit.
Wages paid to majority owners and individuals in his or her family must be carefully considered when filing claims for the Employee Retention Credit. Complications with constructive ownership rules, familial relationships, majority ownership, owner wages, profits interests and direct and indirect ownership can make compliance difficult without qualified professional help.
Understanding how wages paid to family members affects your ERC is an important part of following IRS guidelines for the program. Just like with any refundable tax credit, you want to ensure you have all your ducks in a row and file in a timely fashion to avoid delays.
Stenson Tamaddon was established to aid business owners in fully leveraging available tax credits to support economic growth and innovation. Our tax credit-focused technology supports our clients’ success by maximizing return on investment (ROI) and making filing easy, while ensuring compliance. Contact us on our website or by calling 888-375-1000 to learn how we can serve you!
Are Spouses Eligible for Employee Retention Credit?
It depends. Wages paid to the spouse of a majority owner are generally not eligible for the Employee Retention Credit. Certain exceptions apply if the owner and his or her spouse have no other family members as defined in section 267(c)(4) of the Code.
Are Family Members Excluded From Claiming the Employee Retention Credit?
Yes. Related individuals of a qualifying employer are excluded from claiming the Employee Retention Credit. Related individuals are listed in Sec. 152(d)(2) of the Internal Revenue Code.
How Many Employees Must You Have to Qualify for the ERC?
Both small and large employers can claim the ERC as long as they otherwise qualify. There are different rules for small or large employers, so the distinction is important.
For ERC claims related to wages paid in 2021, large employers are defined as those that had an average of over 500 full time employees (FTEs) in the base year of 2019. For ERC claims related to wages paid in 2020, large employers are defined as those with over 100 FTEs in the same base year 2019.
For large employers, wages can only be included as qualified if the employee was paid but did not actually work. This limitation can severely limit the ability to claim the ERC for large employers.