Do Tipped Wages Count as Eligible Wages Under the ERC?
The government response to the COVID-19 pandemic had a massive impact on the hospitality industry, and several states required restaurants, hotels, entertainment venues, and travel organizations to fully shut down or massively shift their way of doing business.
In response to the devastating economic impact these shutdowns had and the ripple effect of the ensuing fear, the government passed several relief packages, including the Employee Retention Credit (ERC).
Eligible employers can now claim up to $26,000 per employee as an IRS tax credit. As you calculate your potential credit, you are likely wondering if tips count as eligible wages. This article answers that question and provides other helpful eligibility information about ERTC hospitality guidelines.
Determining Eligibility for ERTC
For a restaurant or other business in the hospitality industry to be eligible for the ERC (also referred to as ERTC for Employee Retention Tax Credit), one of three things must have happened:
- The business experienced a 50% decline in gross receipts in 2020 compared to 2019 and a 20% decrease in 2021 compared to 2019. Eligibility is determined on a quarterly basis, so if you don’t qualify in one quarter, you can still get funds for other qualifying quarters.
- The business must have experienced an impact on operations due to a government mandate. Examples are a capacity restriction or forcing a restaurant to offer curb-side pick-up only.
- Another way to be eligible for ERC is to have started the business after February 15, 2020, and have less than $1 million in revenue.
In 2020, a business could have up to 100 full-time employees and still qualify, and that number expanded to up to 500 FTEs for 2021. For businesses straddling the FTE maximum, remember that part-time employees do not count toward this calculation, but the wages of part-time employees can still be used in calculating your total ERC credit.
How the $26,000 ERC is Calculated
If you’re wondering how the “up to $26,000 per employee” is calculated, here’s a breakdown:
- Up to 50% of the employee’s wages up to $10,000 could be credited in 2020, allowing for a maximum refund in 2020 of $5,000.
- Up to 70% of the first $10,000 in wages could be credited for the first three quarters of 2021. This equals $7,000 x 3 quarters = $21,000.
- Adding the 2020 annual figure and the 2021 quarterly figures yields $26,000.
Are Tips Part of the ERC Wage Calculation?
Generally, tips are classified as income and, therefore, qualified wages. There is, however, an exception. According to IRS Notice 2021-49, tips count toward wages in calculating the ERC credit when the dollar amount of the tips is greater than $20 in a calendar month.
Given this relatively low threshold, most tips count as qualified wages, which can increase the total Employee Retention Credit. Both cash and credit card tips are included.
The only caveat to be aware of is the tips must be reported as taxable income to be included in qualifying wages. Further, the tips must have been given to a server or bartender. Tips given to other employees cannot be applied to the formula.
If you already applied for ERC and did not include tips in your qualifying wages, it’s not too late to amend your application. You can refile Form 941-X until April 15, 2024, to claim ERC for 2020 and until April 15, 2025, to claim ERC for 2021.
Need Help Getting the Maximum ERC Refund?
The experienced team at Dayes Law Firm has helped hundreds of business owners file for ERC credit, demonstrating a proven track record of success. To learn more about your eligibility and potential credit, contact us at 800-503-2000 for a no-cost, no-obligation consultation.