Key Takeaways:
- The ERC is a fully refundable credit that many businesses qualify for
- The credit is 50% of up to $10,000 paid in wages for 2020 and 70% of up to $10,000 paid in wages per quarter in 2021
- Businesses need to have shut down operations partially or fully because of a government order or lost gross receipts in the amount of 50% for 2020 and 20% for 2021
- Qualified wages include wages and compensation subject to FICA, including certain health plan expenses and cash tips, as long as the employee made over $20 in a month from tips
- Six tips for restaurants and other businesses for the ERC:
- Part-time employees don’t determine large employer status
- Wages for both part-time and full-time workers qualify
- Claim the last quarter of 2021 if a recovery startup business
- You can claim the ERC even with a PPP loan
- You can use the same tips for ERC and FICA credits
- Complete and submit the right documents to the IRS
- You can still submit Form 941-X as an amendment to alter your amount even if you already claimed the ERC
- You have three years from your original tax return filing date to claim the ERC
- Partial government-ordered shutdowns, like earlier closing hours, still qualify you
- Restaurants owned by the same group must pool gross receipts for the calculations
- You can’t claim the ERC and the work opportunity tax credit for the same employee for the same period
Most businesses around the globe saw some kind of impact from the COVID-19 pandemic. Even those that could continue operations normally still saw a shift from an in-office to remote workforce. Many small businesses had to cease operating for a time or change the way their businesses operate. The hospitality industry was especially hit hard since much of its business relies on in-person experiences, whether restaurants, hotels, events, entertainment companies, or travel organizations.
The government fortunately passed legislation early on in the pandemic to help businesses keep their doors open during the closures and changes. Tax credits were a big incentive to help employers keep people on the payroll. Some businesses, however, have not taken full advantage of these benefits.
One common question from hospitality businesses is: do tips qualify for employee retention credit (ERC)? This ERC guide walks through everything you need to know about qualified wages and the ERC, plus how to put everything into practice properly.
How Does the ERC Work?
Let’s first talk about how the ERC works and why businesses like restaurants should care about it. The ERC is a fully refundable tax credit, and qualifying businesses could receive up to $26,000 per employee in total.
The ERC was part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of 2020, which provided relief programs and stimulus to Americans during the pandemic. This act set forth that the ERC was 50% of qualified wages, up to $10,000, for 2020. Businesses could thus claim up to $5,000 per employee for the year.
Subsequent legislation extended the ERC for 2021, and increased the credit to 70% of qualified wages, up to $10,000 per quarter for 2021. Businesses could claim up to $7,000 per employee per quarter, or $21,000 per employee per year. Businesses must meet these ERC qualification requirements to qualify for both 2020 and 2021:
- Had to close the business because of a governmental order or
- Saw a loss in gross receipts of 50% for 2020 and 20% for 2021, when compared to the same quarter in 2019
The ERC ended on Sept. 30, 2021, for all businesses except recovery startup businesses that began operations after Feb. 15, 2020, and have less than $1 million in average annual gross receipts. Qualifying quarters for 2020 are between March 13 and Dec. 31, and for 2021, most businesses qualify for Jan. 1 through Sept. 30. Qualifying businesses can claim the ERC for three years after their initial tax return, so you can file an amendment to claim the ERC retroactively.
What Are Qualified Wages?
One major question brought by the ERC is which wages qualify for the credit. The initial ERC wasn’t very clear about certain terms, like whether cash tips could count as eligible wages. The IRS released Notice 2021-49 to provide clarity on these matters, and there is now certainty that most tips are eligible. Here is what you need to know about qualified wages for the ERC:
Wages Subject to FICA Taxes
Any wages and compensation paid to employees, and qualified health plan expenses that are allocable to those wages, qualify for the ERC; so, any wages subject to Federal Insurance Contributions Act (FICA) taxes. They just have to have been paid according to the guidelines mentioned above–when the business had to close because of a government order or gross receipts saw a significant loss. It’s also worth noting that qualified group insurance premiums and some qualified production activities payments may qualify for the ERC.
Are Tips Qualified Wages for ERC?
Yes, tips can be considered qualified wages for the purposes of the ERC. However, there are some limitations on which tips can be counted towards qualified wages.
Firstly, only tips that are reported to the employer as taxable income can be included in qualified wages. This means that any unreported or cash tips cannot be counted towards the ERC.
Secondly, tips are subject to additional limitations based on industry-specific rules. For example, in the restaurant industry, only tips that are received by waitstaff or bartenders can be included in qualified wages. Tips received by other employees such as cooks or dishwashers cannot be counted towards the ERC.
The IRS’s Notice 2021-49 provided that cash tips, which includes credit card tips, that are reportable for payroll tax can qualify for ERC wages as long as the business meets all other requirements. Tips are reportable if the employee received more than $20 in a month, so anything under that amount per employee would not qualify.
Small vs. Large Employer Wages
The distinction between small and large employers is important for the ERC. The initial CARES Act for 2020 stated that large employers were those with more than 100 full-time employees, which was expanded to 500 full-time employees for 2021. Large employers can only count wages paid to employees when they are not providing services.
Make sure you carefully calculate qualified wages when figuring your ERC. Remember that only certain quarters of 2020 and 2021 qualify. Determine whether you are a small or large employer before calculating your credit. Consult with an ERC expert if you have uncertainty about eligibility as they can walk you through the guidelines.
Six ERC Tips for Restaurants and Other Small Businesses
The fact that businesses can claim tips as qualified wages for the ERC is a big win for restaurants and the hospitality industry. There are a few other things to know about the ERC and what it looks like in practice. These tips will help when you’re preparing to claim the ERC retroactively for your business:
1. Part-Time Employees Don’t Determine Large Employer Status
A perk for a business like a restaurant, which has many part-time employees, is that these workers don’t factor into your count for determining whether you’re a large or small employer. This means it’s more likely you will be able to claim all qualified wages during eligible quarters.
2. Wages for Both Part-Time and Full-Time Workers Qualify
You can also use qualifying wages paid to both full-time and part-time employees during qualifying periods for your credit. The gist is that employee status only applies to determining how large of an employer you are.
3. Claim the Last Quarter of 2021 if a Recovery Startup Business
Don’t forget that if your restaurant or other business started after Feb. 15, 2020, and you see less than $1 million in average annual gross receipts, you can claim the ERC for the last quarter of 2021. That’s a potential extra $7,000 per employee.
4. You Can Claim the ERC Even if You Received a PPP Loan
The initial rollout of the ERC did not allow businesses to claim the ERC if they also received a Paycheck Protection Program (PPP) loan. Later clarifications to the legislation specifically stated that you are allowed to do both, however, as long as you don’t use ERC funds for the same expenses covered by your PPP loan.
5. You Can Use the Same Tips for ERC and FICA Credit
There’s another perk if your business provides cash tips to employees. You can use those same tips for both the ERC and the FICA credit.
6. Complete and Submit the Right Documents to the IRS
The ERC benefit ended in September 2021, so at this point, if you’re claiming the ERC you are doing so retroactively. You will be amending your originally submitted Form 941, Employer’s Quarterly Federal Tax Return. You’ll use Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund to report the claim. You will need:
- Your basic business information
- The quarter you’re correcting
- The date you discovered the error you’re correcting (or the date you figured out that you qualify for the ERC and how much your credit would be)
- The amount of your Employee Retention Credit for that quarter
- An explanation of your corrections in a narrative format
You will need to submit a separate Form 941-X for each quarter you are correcting.
The ERC could have a monumental impact on your business, so make sure you claim it by the deadline and provide accurate, up-to-date information to the IRS. A seasoned tax or ERC professional can help review your situation, determine your eligibility, and file Form 941-X to claim the credit retroactively.
Common Pitfalls of the ERC for Hospitality
It’s common for businesses and individual taxpayers to make mistakes on their tax returns. Doing so, however, can lead to delays in getting your refund, audits by the IRS, or even criminal charges if you knowingly did something wrong. It’s best to avoid all potential issues. Here are a few pitfalls and scenarios to be aware of:
- You can resubmit Form 941-X if you have already applied for the ERC but didn’t include qualified tip wages. You will still use Form 941-X to amend your original tax return.
- You will have until April 15, 2024, to claim the ERC for 2020, and until April 15, 2025, for 2021. Don’t skip these deadlines if you qualify as you could miss out on tens of thousands in a potential refund from the IRS that can help you cover costs.
- Remember that a partial shutdown because of a government order still qualifies your business for the ERC for that period. That means even if you just had to close earlier in the day for a few weeks, you could qualify.
- Say you have multiple restaurant locations, some in different states. One of those states issuing a government order for closure, and the subsequent shutdown of that location, would qualify you for the ERC since it would be a partial suspension of operations for your business.
- Restaurants that exist in a collective group with the same ownership count the combined total of gross receipts to determine eligibility, not the gross receipts from each individual restaurant location.
- Many restaurants and other businesses claim the Work Opportunity Tax Credit (WOTC). You can’t claim the ERC and the WOTC for the same employee for the same period. This is often referred to as “double dipping.”
Remember that most restaurants will qualify for the ERC for 2020, 2021, or both, since the hospitality industry was significantly impacted by mandatory closures and loss of business. Carefully review your records, make sure to double-check your calculations, and submit your Form 941-X as soon as you can. Work with a tax professional when you’re not sure about eligibility requirements or qualified wages.
Contact ERC Today With Questions About Qualified Wages
The Employee Retention Credit is the largest stimulus program from the government ever to exist. This is why it’s crucial for you to assess eligibility while there’s still time to claim your credit. The ERC could mean tens of thousands of dollars to help keep your business afloat as we continue to recover from the pandemic.
The team at ERC Today is ready to answer any questions you have about the ERC, eligibility requirements, tax forms, and other concerns. We stay up on the latest laws and regulations to help advise you and ensure you move forward with your claim properly.
Contact ERC Today for more information about your Employee Retention Credit options.
