Great news for restaurants – the IRS has confirmed that tips are eligible wages for restaurants accessing the Employee Retention Credit (ERC). IRS Notice 2021-49 provides guidance for third and fourth quarters of 2021, addresses new programs and amplifies previously issued notices 2021-20 and 2021-23 clarifying many unanswered questions. We wanted to summarize the highlights for our restaurant clients and community so you can take advantage of this frequently overlooked benefit that could mean thousands of dollars in your pocket. Our team of experts at Payroll Network can help you compute and maximize your ERC. Don’t hesitate to reach out to us for more information.
How Does IRS Notice 2021-49 Help Restaurants?Tips count as eligible wages.
The IRS confirmed that any cash tips, including credit card tips, are reportable for payroll tax purposes are eligible as wages for 2020 and 2021 ERCs, if an employee’s tips exceed $20 per month.Businesses can receive both the ERTC and the section 45B credit for the same wages.
According to our partner, National Restaurant Association Analyst Aaron Frazier, eligible businesses can access 50% of up to $10,000 in eligible wages for ERC in 2020, for a total of $5,000. In 2021, that percentage rises to 70% of up to $10,000 in eligible wages during each calendar quarter, for a total of $7,000 each quarter.
Tips for Filing a Form 941-X
The new guidance is applicable to the ERC in both 2020 and 2021, but will likely have the most impact on 2021 credits, considering “large employer” changes. Restaurants with 500 or less full-time equivalents (FTEs) that have tipped employees and that otherwise are eligible are encouraged to consider claiming credits for quarters 1 and 2 of 2021.
Restaurants that have already claimed ERC credits without including tips should consider filing Form 941-X for any quarter in which the inclusion of tips would result in additional credits. Restaurants that previously filed Form 941-X to claim the ERC without tips can file a second Form 941-X for the same quarter. To avoid confusion, restaurants that want to file a second Form 941-X to include tips should wait until receipt of the refund from the first Form 941-X.
The same tips can be used for the computation of both the ERC and FICA credit.
Notice 2021-49 specifically states that eligible employers “are not prevented from receiving both the ERC and the IRC Section 45B credit for the same wages.” This guidance, effective for both 2020 and 2021 ERCs, is more great news for the restaurant industry, which is the primary beneficiary of the 45B credit.
As a reminder, taxpayers that claim the ERC and the FICA credit must forego tax deductions for the amounts that give rise to these credits. In the case of the ERC, this means foregoing a tax deduction for the amount of qualified wages (including qualified health plan expenses) equal to the ERC. In the case of the FICA credit, the deduction for payroll tax is reduced by the amount claimed as a FICA credit.
Notice 2021-49 sets forth the IRS’ position that when a taxpayer claims the ERC, the qualifying wages deduction disallowance should be made in the same year that the wages were paid or incurred. As a result of this language, restaurants that amend tax year 2020 Form 941 filings to claim the ERC may also need to amend their 2020 business income tax returns to reflect the appropriate amount of wage disallowance.
Defining “large employer” status.
The determination of whether a restaurant is a large employer for purposes of the ERC is critical to the credit’s computation.
Eligible restaurants that are large employers can only claim the ERC for wages paid to employees for the time they are not providing services. This aligns with the purpose of the ERC, which is to encourage employers to retain and compensate employees during periods in which businesses are not fully operational. Smaller eligible restaurants, on the other hand, can claim a credit for all wages paid to employees.
Notice 2021-49 confirms that large employer status is determined by counting the average number of FTEs (rather than full time equivalent employees (FTEEs)) employed during 2019. For this purpose, FTE means an employee who, with respect to any calendar month in 2019, worked an average of at least 30 hours per week or 130 hours in the month. This guidance is effective for tax year 2020 and 2021 credits.
Confirmation that FTEs, rather than FTEEs, are used in the determination of large employer status is advantageous for the restaurant industry, which typically employs a large number of part-time employees. Omitting part-time employees from the large employer computation will result in more restaurants having 500 or less FTEs and therefore that are able to claim the ERC for all wages paid to employees in 2021 (assuming the restaurants are otherwise eligible for the ERC).
Want more money in the bank?
Our team of experts at Payroll Network can help you compute and maximize your ERC. Don’t hesitate to reach out to us for more information.
Payroll Network and its subsidiaries do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only.