Are Tips Qualified Wages for the Employee Retention Credit?

While the government passed multiple COVID relief packages for small businesses, including the CARES Act, the quick action often left questions about eligibility requirements. For restaurant owners, many wondered whether tips are included in the Employee Retention Credit. To address this valid concern, the IRS released guidance on when tips are considered qualified wages for the ERC, which also applies to businesses that have already filed for the ERC. 

Here’s everything you need to know about counting tips as qualified wages for this important tax credit.

What Businesses Qualify For the Employee Retention Credit?

Before jumping into whether tips count as wages, make sure your business is eligible for the Employee Retention Credit. The food and hospitality industries were among the most impacted by the pandemic. Many restaurants and other related small businesses that survived and have employees who receive tips as income are likely eligible to meet these requirements.

2020 qualifications:

• Qualifying wages of up to 100 full-time employees
• A decrease in gross revenue of at least 50% compared to the corresponding quarter in 2019
• Or either a full or partial suspension of business operations created by a government mandate 

2021 qualifications:

• Qualifying wages of up to 500 full-time employees
• A decrease in gross revenue of at least 20% compared to the corresponding quarter in 2019
• Or either a full or partial suspension of business operations created by a government mandate

Businesses impacted by the pandemic may qualify under either full or partial suspension of operations. For instance, restaurants that switched from sit-down service to curbside pickup would qualify under a partial suspension. And if your business had locations in multiple jurisdictions, you could still apply based on the government restrictions experienced in some states, even if other states in which you operated were more relaxed.

Are tips qualified wages for the employee retention credit?

In most cases, tips do count as qualified wages, with just a minor exception. Notice 2021-49 from the IRS clarified that tips are included as qualified wages eligible for the employee retention credit as long as they exceed $20 in one calendar month. Under the IRS definition, tips can include cash or any other form of payment. So for each month an employee earned $20 or more in tips, that money can be included in their qualified wages to help qualify for an additional amount from the Employee Retention Credit.

What about the FICA tip credit?

Another clarification from the IRS confirmed that small businesses claiming tips as qualified wages are also eligible to claim the same wages for the FICA tip credit. This credit is available via IRS Form 8846. It allows food industry businesses to receive a tax credit on the social security and Medicare taxes paid on any tip income that’s over the federal minimum wage. Your business can still claim the Employee Retention Credit while simultaneously claiming the FICA tip credit as well.

What if your restaurant already applied for ERC?

Even if your small business already applied for the Employee Retention Credit without including eligible tip wages, it’s not too late to take advantage of this update. You can resubmit Form 941-X as an amendment to your previous tax filing for eligible years.

Note that the application deadlines for the ERC are April 15, 2024 for the 2020 tax year and April 15, 2025 for the 2021 tax year.

Lendio’s tax partners have the necessary expertise to make sure you maximize this tax credit opportunity. Our platform integrates with your HR and payroll systems so you can avoid manually gathering and entering relevant documentation.

_{Information provided on this blog is for educational purposes only, and is not intended to be business, legal, tax, or accounting advice. The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. While Lendio strives to keep its content up-to-date, it is only accurate as of the date posted. Offers or trends may expire, or may no longer be relevant.}