Article written by:
Dustin Minton, CPA
Director, Restaurant Services
Given the newly released clarification around the PPP loan forgiveness calculation from the SBA (in the form of an application and instructions), we can finally answer a frequently asked question regarding the treatment of tipped employees as it relates to eligible payroll costs and the hourly wage reduction penalty impact.
Eligible Payroll Costs
Recall that when you completed your loan application, gross tips (paid by the customer) were included in the definition of payroll costs and used in the formula to calculate your loan amount. The rationale behind the inclusion was to provide the employer with the ability to retain its tipped employees and pay an hourly wage reflective of tips earned, even assuming no customers tips received. However, many tipped employees were laid off prior to the implementation of the PPP.
As restaurants across America begin to reopen, the question has frequently arisen as to whether customer tips could be counted towards eligible payroll costs for the loan forgiveness calculation. The answer is yes. On page 7 of the Loan Forgiveness Application, the definition of Cash Compensation specifically includes “gross tips”. As such, customer tips are payroll costs and eligible for forgiveness. It’s important for tipped employees to declare their tips accurately as you will need to provide evidence of these payroll costs. One caveat to mention is that “gross tips” has not been defined, so the term is being used broadly to include all tips from the customer which is comparative to how the eligible payroll costs were calculated for the original loan application.
Hourly Wage Reduction
Having clarified that gross tips are included in payroll costs, we have a better understanding of how to determine whether an hourly wage reduction penalty applies to a tipped employee. Due to reduced or little operations, tipped employees may not be making the same hourly wage as they were prior to the COVID-19 crisis. As part of the forgiveness calculation, a penalty applies in the form of a reduction in forgiveness when an hourly employee’s hourly wage is less than 75% of the hourly wage previously earned from 1/1/20 to 3/31/20, including customer tips (“Penalty”). However, the debt forgiveness guidance also provides for a remedy to any wage reductions (“Safe Harbor”) as shown below. The Safe Harbor provision provides that if you restore any salary or wage reductions by June 30, 2020, as compared to February 15, 2020 wages or salary, no reduction in forgiveness will occur.
Let’s review an example under a Penalty and Safe Harbor scenario assuming the following for a tipped employee:
- The average hourly wage equaled $20 from January 1, 2020, through March 31, 2020, including customer tips.
- The average hourly wage was reduced to $10 per hour after February 15, 2020, until the employee was laid off on March 16, 2020.
- The employee was rehired on May 18, 2020, at the legal minimum wage for tipped employees.
- Under Penalty scenario, the employee earned an average hourly wage of $14 per hour as of June 30, 2020, including customer tips.
- Under Safe Harbor scenario, the employee earned an average hourly wage of $20 as of June 30, 2020, including customer tips and an employer-paid hourly premium to reach the $20 per hour.
- Under both methods, the employee earned an average hourly wage of $14 per hour during the Covered Period (i.e. the 8-week period after the loan was funded).
| . |
Calculation Methodology |
Penalty |
Safe Harbor |
||
| Step 1 | Determine if pay was reduced more than 25% | ||||
| a. | Enter average hourly wage during Covered Period | $14 | $14 | ||
| b. | Enter average hourly wage of first prior quarter (1/1/20 to 3/31/20) | $20 | $20 | ||
| c. | Divide 1a by 1b | 70% | 70% | ||
| . | |||||
| Step 2 | Determine if Hourly Wage Reduction Safe Harbor is met | ||||
| a. | Enter hourly wage as of February 15, 2020 | $20 | $20 | ||
| b. | Enter average hourly wage between 2/15/20 and 4/26/20 | $10 | $10 | ||
| If 2.b. is equal to, or greater than, 2.a., skip to Step 3. | |||||
| . | Otherwise, proceed to 2.c. | ||||
| . | c. | Enter the average hourly wage as of June 30, 2020 | $14 | $20 | |
| . | If 2.c. is equal to or greater than 2.a., the Safe Harbor has been | ||||
| . | met and no penalty applies; otherwise, go to Step 3 | ||||
| . | |||||
| Step 3 | Determine the Hourly Wage Reduction | No reduction because the Safe Harbor was met | |||
| a. | Multiply the amount entered in 1.b. by 75% | $15 | |||
| b. | Subtract the amount entered in 1.a. from 3.a. | $1 | |||
| c. | Enter the average number of hours worked per week | 25 | |||
| . | between 1/1/20 and 3/31/20 | ||||
| d. | Multiply the amount entered in 3.b. by the amount entered in 3.c., | $200 | |||
| . | then multiply by 8 ($1 x 25 hours x 8 weeks) | ||||
| . |
So what was the difference?
- Under the Penalty scenario, the tipped employee did not receive any additional compensation from the employer to increase the hourly wage during the covered period or by June 30, 2020, to equal at least 75% of the average hourly wage of $20 (hourly wage paid from 1/1/20 to 3/31/20). Further, under the Penalty Scenario, the employer did not restore the wage by June 30, 2020. As a result, a $200 hourly wage reduction penalty applied.
- Whereas, under the Safe Harbor scenario, the employer paid an additional $6 per hour to increase the hourly wage by June 30, 2020, to equal the average hourly wage of $20 (hourly wage paid from 1/1/20 to 3/31/20). As a result, no penalty applied.
- Because tips are included in payroll, the employer could have avoided any potential reduction by paying a premium during the entire covered period to ensure that the employee’s total hourly wage during the 8-week period was equal to at least 75% of $20 (or $15 per hour).
The Safe Harbor only requires hourly pay to be at least 75% but in the Safe Harbor scenario or the third bullet listed above, the employer wanted to get the tipped employee back to 100% either by June 30, 2020 or during the covered period, which also helps the rehiring strategy and overall morale. It is the employer’s discretion as to what they want to pay in excess of the 75% threshold, but remember the loan’s forgiveness is dependent upon how much is spent on payroll which also increases the amount forgiven for nonpayroll costs such as rent, mortgage interest, and utilities.
We know there have been many questions around tipped employee wages and we believe the SBA loan forgiveness application provides the clarity needed to calculate eligible payroll costs, meet the Safe Harbor and avoid an hourly wage reduction.
If you have questions or would like to discuss this matter in greater detail, please contact GBQ’s Restaurant Services Director Dustin Minton.
