How to Determine if Tips Are Qualified Wage for the Employee Retention Credit

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Globally, the COVID-19 pandemic had an effect on virtually all commercial enterprises. Even businesses that were able to keep running normally noticed a shift from in-office to remote workers. There was a widespread shutdown or significant restructuring of small firms. Because of its reliance on live experiences for revenue generation, the hospitality sector was struck particularly hard. This includes the restaurant and hotel industries as well as the entertainment and tourism sectors.

Thankfully, the government quickly developed regulations like ERC Credit to assist businesses in remaining open throughout the pandemic’s many closures and adjustments. Payroll retention was greatly aided by tax credits offered to businesses. Unfortunately, not all companies are reaping these benefits.

Tip eligibility for the Employee Retention Credit (ERC) is a prevalent concern for employers in the hospitality industry. 

This manual for the ERC explains all you need to know about eligible salaries and the ERC Requirements, as well as how to put it into effect correctly.

While Using the ERC, What Should I Expect?

First, I’d like to explain the ERC and why it’s important for businesses like restaurants to participate. The ERC is a tax credit that can be refunded in full for eligible firms, up to a maximum of $26,000 per employee.

The ERC was established as part of the 2020 CARES Act (Coronavirus Assistance, Relief, and Economic Security), which offered relief programs and stimulation to the United States during the pandemic. For the year 2020, the ERC was set at 50% of qualifying wages up to $10,000 according to this law. Hence, companies might submit annual claims of up to $5,000 per worker.

Further legislation boosted the ERC Credit to 70% of eligible wages up to $10,000 per quarter in 2021 and extended the ERC through 2021. In this case, the maximum allowable claim would be $21,000 per employee per year, or $7,000. During the years 2020 and 2021, businesses must satisfy the following ERC qualification requirements:

Closed shop due to a government order or experienced a 50% decline in 2020 revenue and a 20% decline in 2021 revenue compared to the same period in 2019

Except for recovery startup enterprises that started after February 15, 2020, and have less than $1 million in average annual gross receipts, the ERC ceased on September 30, 2021. The first two quarters of 2020 and 2021 are qualifying quarters for most firms. For 2020, the qualifying quarters are from March 13 through December 31. You can make an adjustment to your tax return and claim the ERC retrospectively for a period of three years after you first qualified for it.

Can You Explain the Concept of Qualified Wages?

Whether certain kinds of earnings are eligible for the credit is a key issue raised by the ERC. Some things were not clear in the original ERC Requirements, like whether cash tips could be considered qualified wages. With the release of Notice 2021-49 by the Internal Revenue Service (IRS), there is no longer any doubt about whether tips are taxed or not. What follows is an explanation of ERC qualifying wages:

Salary Income That Is Taxed By FICA

Earnings that are subject to Federal Insurance Contributions Act (FICA) taxes are eligible for the ERC. This includes wages and other compensation given to employees, as well as qualified health plan expenses that are tied to those wages. All that is needed is that they were paid according to the above conditions, like when the business had to close because of a government order or when gross sales dropped by a lot. The ERC Credit may also be available for payments for qualified manufacturing activities and qualified group insurance premiums.

Tips in Cash

Notice 2021-49 from the IRS says that cash tips, including credit card tips, that must be reported for payroll tax can count as ERC wages as long as the business meets all other requirements. Any tips received by an employee that are less than $20 per month do not have to be reported.


Here are six ERC pointers for eateries and other local establishments.

The restaurant and hotel industries benefit greatly from the fact that tips can be included as qualified wages for the ERC. There are a few more details about the ERC Requirements that are important to understand. Following these guidelines will allow you successfully apply for the ERC retroactively for your company:

  • First, the presence of part-time workers is irrelevant for determining whether or not an organisation is considered a large employer.

Restaurants benefit from part-time workers not being counted when determining an employer’s size. 

This improves your chances of reporting all qualified revenue for the quarters in question.

  • Second, both part-time and full-time workers’ earnings are applicable.

Full-time and part-time employees can both use qualifying salaries paid during qualifying periods. The only time employee status matters is when calculating how big of an employer you are.

  • If your company is a recovery startup, you can claim the final quarter of 2021.

Remember that you can get the ERC for the fourth quarter of 2021 if your restaurant or other business opened after February 15, 2020 and has yearly gross receipts of less than $1 million. Each worker might receive an additional $7,000.

  • If you have a PPP loan, you are still eligible for the ERC.

The ERC originally barred companies who borrowed through the Paycheck Protection Program from claiming the credit. As long as you don’t utilise ERC Credit funds for the same expenses covered by your PPP loan, later clarifications to the legislation made it clear that you can do both.

  •  The Procedures for ERC and FICA Credit Are the Same

If your company offers cash tips, that has additional benefits. Such strategies also apply to the ERC and the FICA credit.

  • File Accurate Forms with the US Revenue Service

As ERC was meant to end in September 2021, you are receiving it backwards. It looks like you need to make some changes to your previously filed Form 941, Employer’s Quarterly Federal Tax Return. Report the claim on Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. You need to have these items in order to accomplish this:

  • The fundamentals of your company
  • Your corrections for the current quarter
  • Time stamp of when you first noticed the mistake you’re fixing (or the date you figured out that you qualify for the ERC Credit and how much your credit would be)
  • Your quarterly Employee Retention Credit amount
  • Your narrative justification for the changes you made


The Employee Retention Credit is the government’s most extensive stimulus program in history. You must determine your credit eligibility while there is still time to apply.

The ERC could provide tens of thousands of cash to your company during the pandemic recovery. If you have any questions about ERC Requirements, please contact ClaimERCCredit today.



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