ERTC and the Aggregation Rules: How Parent and Subsidiary Businesses Are Impacted

The Employee Retention Tax Credit (ERTC) has been a powerful tool for helping businesses retain employees and recover from COVID-19-related disruptions. However, for businesses with complex ownership structures—particularly parent companies and subsidiaries—the ERTC eligibility rules can get complicated quickly.

Enter the aggregation rules.

The IRS requires certain related businesses to be treated as a single employer when determining ERTC eligibility, employee counts, and wage calculations. If you're part of a corporate group, understanding these rules is critical to claiming the credit accurately and avoiding costly compliance errors.

In this article, we’ll break down:

• ✅ What the ERTC aggregation rules are

• ✅ Which businesses are affected

• ✅ How aggregation impacts eligibility and credit limits

• ✅ Common mistakes and how to avoid them

1. What Are the ERTC Aggregation Rules?

The IRS aggregation rules require businesses with common ownership or control to be treated as one employer for ERTC purposes. These rules are based on provisions from Sections 52(a), 52(b), and 414 of the Internal Revenue Code.

These rules affect:

• Employee headcount

• Gross receipts tests

• Eligibility for ERTC based on government orders or revenue decline

In short, if your business is part of a group of companies, you can’t evaluate each company’s ERTC eligibility in a vacuum—you must consider the entire group as one entity.

2. When Are Businesses Considered Aggregated?

The IRS outlines several tests to determine if businesses must be aggregated for ERTC:

✅ Controlled Group of Corporations

Occurs when one entity owns:

• 80% or more of another corporation, or

• Multiple corporations under common ownership

✅ Common Control of Trades or Businesses

Includes partnerships, sole proprietorships, and corporations where the same individuals own a controlling interest (generally 80% or more).

✅ Affiliated Service Groups

Applies when businesses provide services in conjunction with or on behalf of related entities (e.g., law firms or medical practices under common branding).

💡 If any of these rules apply, your businesses are aggregated—and treated as one employer for ERTC purposes.

3. How Aggregation Affects ERTC Eligibility

🚧 Employee Count Threshold

ERTC eligibility depends on full-time employee count:

• 2020: Businesses with 100 or fewer full-time employees could claim ERTC for all wages.

• 2021: Threshold increased to 500 full-time employees.

💡 If you’re part of an aggregated group, you must count total full-time employees across all related businesses.

Example:

• Parent Company A has 80 employees

• Subsidiary B has 50 employees
  ➡ Aggregated total = 130 employees
  ➡ The group exceeds the 100-employee threshold for 2020, so they can only claim ERTC for wages paid to employees not providing services.

📉 Revenue Reduction Test

For 2021, ERTC eligibility required a 20% drop in gross receipts compared to the same quarter in 2019.

With aggregation, gross receipts must be calculated for the entire group—not for each entity separately.

Example:

• Subsidiary C saw a 25% revenue decline

• Parent Company D had a 10% revenue increase
  ➡ Combined result: less than 20% decline
  ➡ No ERTC eligibility for the group

📄 Government Order Test

If any part of the aggregated group is subject to a government order that limits operations, all members may be eligible for ERTC—if the order affects a significant part of the group’s business.

This can work in your favor.

4. ERTC Wage Limitations Under Aggregation

Because aggregated groups are considered one employer, the maximum credit amount ($5,000 per employee in 2020, $7,000 per quarter in 2021) applies per employee across all entities.

Example:

• Employee Jane works for both Subsidiary X and Subsidiary Y (same aggregated group)

• Combined eligible wages across both jobs = $15,000 in Q1 2021
  ➡ Only $10,000 of Jane’s wages can be used to calculate ERTC
  ➡ Credit = 70% of $10,000 = $7,000

5. Common Mistakes Businesses Make with Aggregation

🚩 Mistake #1: Calculating Eligibility Separately

Failing to aggregate companies often results in incorrect ERTC claims.

🚩 Mistake #2: Miscounting Employees

Many businesses overlook shared staff or part-time hours, leading to errors in employee counts and thresholds.

🚩 Mistake #3: Ignoring Revenue from Other Entities

You cannot ignore one entity’s revenue just because it’s not claiming the credit—all revenues must be combined.

🚩 Mistake #4: Double-Claiming Wages

Employees who work for multiple companies within the group can’t have the same wages used multiple times for ERTC.

6. How to Stay Compliant with ERTC Aggregation Rules

✅ Step 1: Determine Ownership Structure

Work with a CPA to assess whether your businesses meet the controlled group or common control criteria.

✅ Step 2: Aggregate Your Data

Combine:

• Gross receipts

• Employee counts

• Eligible wages

✅ Step 3: Coordinate ERTC Claims Across Entities

Ensure only qualified wages are used once per employee, and all members follow consistent ERTC reporting practices.

✅ Step 4: Maintain Detailed Records

In the event of an IRS audit, you’ll need to:

• Prove your aggregation status

• Show accurate wage calculations

• Provide financial documentation for all entities involved

Aggregation Rules Are Critical for ERTC Success

If your business is part of a parent-subsidiary group or shared ownership structure, understanding the ERTC aggregation rules is essential. Whether you’re claiming the credit or considering an amendment, failing to apply these rules correctly can result in denied credits or penalties.

Key Takeaways:

• Aggregation rules treat related entities as one employer for ERTC.

• You must combine gross receipts and employee counts.

• Apply ERTC wage limits and eligibility consistently across all entities.

• Work with tax professionals to ensure compliance.

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