The Employee Retention Credit (ERC) is a refundable tax credit, meant to offer financial aid to business owners who kept employees on the payroll during the coronavirus pandemic. The amount of the ERC is determined by the amount of qualified wages paid out during certain time periods. Tips can be included in these qualified wages, but only when certain conditions are met.
When Do Tips Count as Qualified Wages?
When the ERC was first introduced, there was some confusion from service industry businesses, such as restaurants, as to whether or not tips did or did not count as qualified wages. In an effort to alleviate this confusion, the IRS released Notice 2021-49. This notice clarified that in most cases tips will in fact count as qualified wages, as long as the amount of tips an employee earned exceeds $20 in a calendar month. According to the IRS, tips can include cash or any other form of payment. You should make sure to include all tips that are eligible, to maximize the credit you receive, as the ERC is not considered taxable income.
What Tips Are Excluded from ERC?
According to Notice 2021-49 from the IRS, tips are almost always going to count as qualified wages for the ERC. The only exception to this is if the employee in question earned less than $20 in tips in a calendar month. In this case, the tips for that month would not count as qualified wages, and could not be included in the calculation for the ERC.
Qualified Wages for Small vs. Large Employers
When calculating qualified wages for the ERC, it is vital to be aware of whether you are considered a small employer or a large employer. This is not up to personal opinion, but instead determined by criteria set forth in the CARES Act. When first implemented, the CARES Act stated that any business with more than 100 full time employees is considered a large employer. This was later changed for 2021, so that any business with more than 500 full time employees would be considered a large employer for that year. Due to this change, you could be considered a large employer in regards to the ERC for 2020, and a small employer for 2021.
If you are considered a large employer, it will drastically change how you calculate qualified wages for the ERC. When calculating qualified wages, a large employer is only permitted to include an employee’s wages if that employee was providing no services at the time of payment. For this reason, it is often seen as more desirable to be considered a small employer when considering the ERC, as you will be able to include wages that a large employer could not.
What Is the FICA Tip Credit?
The FICA tip credit is a tax credit received by food industry businesses on the social security and medicare taxes paid on any tip income that is over the federal minimum wage. This credit is available via IRS form 8846. Many employers were curious if they were still able to claim the FICA tip credit, if they were also claiming the ERC. The IRS has clarified that food industry businesses are permitted to simultaneously claim the ERC and the FICA tip credit, using the same wages for both. Essentially, this means that you can “double dip” on the same tips and receive both credits.
Can You Use Tips for Both ERC and PPP?
During the coronavirus pandemic, many businesses suffered financial losses and found it difficult to retain all of their employees. The Paycheck Protection Program (PPP) was the federal government’s first attempt at incentivizing employers to keep employees on payroll. The PPP allowed business owners to apply for low-interest private loans, which were to be used to cover payroll expenses. The size of the PPP loan could be up to 2.5 times the applicant’s average monthly payroll, including tips.
When the ERC was first made available to business owners, those who had received a PPP loan were not eligible to apply for the ERC. The IRS later changed this, allowing businesses that received a PPP loan to also receive the ERC. However, when applying for the ERC, the same qualified wages used when applying for the PPP loan, cannot be used again. This means that while you can use tips in calculating the amount of both the ERC and the PPP loan, tips from a specific time period may only be used for one or the other.
Apply for the ERC Tax Credit with a Trusted Consultant
If you think you qualify for the ERC tax credit, contact a trusted consultant to help you through the application process. Five Star ERC Experts consists of reputable, certified tax attorneys and tax accountants, dedicated to helping you navigate the process and who can help you get in line faster with the IRS. Do not fall into the pitfalls of ERC mills, or companies that try to scam businesses into applying even when they do not qualify. Through Five Star ERC Experts, you will avoid upfront fees that unqualified ERC consultants make.