On August 4, 2021, the IRS released Notice 2021-49 which contained further clarification on several items relating to the Employee Retention Credit (ERC):
- Tips paid as qualified wages: Notice 2021-49 has clarified that tips earned by employees, if the total tips in a calendar month are more than $20, are considered qualified wages up to the maximum eligible wages based on the applicable year’s rules, as long as all other requirements to treat the amounts as qualified wages are satisfied. This is a significant clarification that may allow many restaurants to generate larger ERC amounts. Given the uncertainty around the treatment of tips for the ERC, some taxpayers were not including them in their initial ERC calculations. If an amended 941 has already been filed to claim the ERC and had not included tips as qualified wages, it is recommended to wait until the original 941 amendment is processed by the IRS prior to filing an additional amended return.
- Interaction with §45B (“FICA Tip”) credit: An employer is allowed a credit in the amount of FICA tax paid on tips that exceed the federal minimum wage. This credit is calculated on and reported on the income tax return of the company. Under Notice 2021-49, tipped wages are eligible for both the FICA Tip Credit and the ERC.
- Timing of wage disallowance deduction: It has been long-standing that a deduction for wages should not be afforded to the company in an amount equal to the wages used to generate the ERC. However, the timing of the disallowance of the deduction was not clear. The IRS has clarified that the disallowance must occur in the year the wages are paid versus the year the refundable credit is obtained. This means that if a company has filed an amended 941 for the 2020 tax year to claim the ERC, the disallowance must be included on the 2020 income tax return. If the income tax return has already been filed, an Amended Return or Administrative Adjustments Request (AAR) must be filed.
- Determination of the number of full-time employees (FTEs) in determining qualified wages: In computing the number of FTEs, you are not required to include full-time equivalents in the calculation. Instead, you look at the number of employees that had an average of 30 hours per week or 130 hours in the month of services provided as laid out in IRC 4980H.
Article written by:
Ryan Kilpatrick, CPA
Senior Manager, Tax & Business Advisory Services
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