The Employee Retention Tax Credit (ERTC) is a valuable credit intended to help businesses recover after the COVID-19 pandemic. If your business qualifies, you could claim thousands of dollars for hiring workers, training staff, marketing, and other expenses.
However, there’s a catch for family-owned businesses: Wages paid to a majority owner and their spouse may not be eligible for the ERTC. Here’s what you need to know about ERTC rules for family-owned businesses and how they may affect you.
How Do ERTC Guidelines Affect Family-Owned Businesses?
When the IRS introduced the ERTC program, it stated that wages are eligible for the ERC so long as businesses paid them to full-time employees. Thousands of family-owned businesses took advantage and claimed the credit for the owner and relatives who worked for their business.
In 2021, the IRS issued Notice 2021-49, which says that wages paid to a majority owner and their spouse are no longer eligible for the ERTC. This new rule prevented owners from claiming a credit they desperately needed to keep their businesses afloat.
Who Does the IRS Consider a Family Member for ERTC Purposes?
The IRS doesn’t only consider spouses of majority owners when it comes to ERTC eligibility. Owners may not claim the credit for wages paid to employees who are related to them, including:
- Mothers and fathers
- Children or their children
- Siblings
- Grandparents
- Aunts and uncles
- Nieces and nephews
- A son-in-law, daughter-in-law, or any other in-laws
- Anyone else who is a member of the owner’s household
Oddly, however, the IRS left a bit of a loophole for certain owners of family businesses. You can claim the credit for yourself and your spouse if you have no siblings or other family.
Do You Have To Pay Back the Credit If You Claimed It for a Family Member?
Although the IRS prohibits majority owners from claiming the credit for family members through its constructive ownership rules, there is no legal requirement that you must pay the credit back if you claimed it before the issuing of Notice 2021-49.
If the IRS audits you, you probably won’t have to pay penalties for claiming the credit prior to Notice 2021-49 (as long as you didn’t knowingly commit fraud). However, audits can be complex and stressful, so it may be smart to talk with a lawyer or financial advisor if you think the IRS may audit your business.
What To Avoid When Calculating the ERTC
The IRS has clear rules as to who can claim the ERTC and which wages (and employees) you can claim the credit for. To avoid any delays in processing your credit, here’s what to do (and not do):
- Don’t include the wages of a non-qualifying majority owner.
- Don’t include wages for family members, even if you only have limited contact with them.
- Ensure that you meet the requirements for an eligible business.
- Ensure that you correctly apply wage limits.
- If you claimed family leave or sick leave wages for the Families First Coronavirus Act, don’t claim them for the ERTC.
- If you filed Form 7200 to request advance payments of employer credits, remember to account for that when claiming the ERTC.
Contact Us To Learn How ERTC Rules May Affect You
If you’re the owner of a family business, the IRS guidelines as to who can and can’t claim the credit can be confusing. Dayes Law Firm will walk you through these guidelines and help you understand whether or not you’re eligible to claim the ERTC.
To find out more about ERTC rules for family-owned businesses, call us at 866-567-4510.