2020 Employee Retention Credit affect on S-Corp wage deduction

[Drphibes]

Have a larger restaurant that has 70 employees as defined by the calculations from the 2019 payroll data, so small employer rules for the Employer Retention Credit (ERC).  I believe the 2020 Qualified Wages for the credit is:

Qualified Wages = Wages + Tips - payroll from 1/1/20 thru 3/11/20 - wages used for PPP loan forgiveness

Qualified Wages/70(for this employer) = wage per employee.  In this case, they will not hit the max $10,000 per employee but not far from it.  Call this Qualified Wage per Employee (QWE).

Do I need to subtract the tips from Qualified Wages if the S-Corp is passing along the credit for Social Security and Medicare Tips (call this credit SSMT) to the shareholders (changing the Qualified Wages amount) or will the SSMT credit be subtracted from the Employee Retention Credit in the 941-X?   If the former, it will change Qualified Wages used to determine the ERC which can not be used as a deduction in the S-Corp return. S-Corp on extension but time running out.

Thanks in advance!

[George4Tacks]

Try this thread https://proconnect.intuit.com/community/lacerte-tax-discussions/discussion/lacerte-tax/00/121738

[qbteachmt]

"Do I need to subtract the tips from Qualified Wages if the S-Corp is passing along the credit for Social Security and Medicare Tips (call this credit SSMT) to the shareholders (changing the Qualified Wages amount) or will the SSMT credit be subtracted from the Employee Retention Credit in the 941-X?"

I think you are mixing apples and oranges. Wages and Taxes are not the same thing.

The FICA Tip Tax Credit allows employers to take a credit on a portion of the employer FICA taxes paid on the employee tips. If the business is a pass-thru entity, the credit will pass through to the business owners on IRS Form K-1 and the business owner will take the tax credit on their individual income tax return. The credit is only allowed to offset income tax liabilities and cannot offset employer payroll tax liabilities.

[Drphibes]

Thanks for the reply, 

Just seems that the Corp/client is getting two credits based on the same tips despite one being an income tax credit and the other 941 credit.  Went through the 941/941x instructions in detail and don't see where the credits offset each other so now going through the latest instructions for form 8846. 

[qbteachmt]

Here is an example of Apples = Apples, which is not your question:

"83. May employers receive the credits under section 51 of the Internal Revenue Code (the Work Opportunity Tax Credit or WOTC) and the Employee Retention Credit for the same employee for the same period?

No. An Eligible Employer may not claim the Employee Retention Credit and the WOTC for the same employee for the same period of time."

"and the other 941 credit."

The 941 can be used to fund the Retention (Cares Act) credit. From Form 8846: "Certain food and beverage establishments use this form to claim a credit for social security and Medicare taxes paid or incurred by the employer on certain employees’ tips. The credit is part of the general business credit."

I found this:

https://www.bdo.com/insights/tax/business-incentives-tax-credits/irs-issues-additional-guidance-on-t...

"Treatment of Tips and FICA Tip Credit

Considerable confusion has arisen as to whether tips count as qualified wages for the ERC, since customers (not the employer) generally pay the employee the tips. Notice 2021-49 clarifies that cash tips are qualified wages if all other requirements to treat the amounts as qualified wages are met. The notice also confirms that eligible employers are not prevented from receiving both the ERC and the FICA tip tax credit on the same wages."

And:

"Notice 2021-49 confirms that this reduction in the deduction amount must occur in the same tax year the ERC is claimed. Accordingly, if an employer files a claim for the credit for a prior tax year, it must also file an amended federal tax return to reduce the amount of the wage deduction claimed in the corresponding period."

[qbteachmt]

Let me try this one more time: The ERC is credit for the compensation considered to be Wages, because of changes in operations affecting staff compensation, per Cares Act. The FICA Tip Credit is a Business Credit against the Employer payroll tax expense computed on specific wages, and that also removes the tax amount as a deduction (to avoid double dipping).

Apples and oranges.

[qbteachmt]

And while we are here:

https://www.paychex.com/articles/compliance/employee-retention-credit

Is a great article covering 2020 and 2021, which has differences due to the two 2021 acts (CAA and ARPA).

[Drphibes]

But if the ERC is reducing the payroll FICA taxes including the tip income, does that mean there is less or no FICA tax to calculate the Business credit from FICA paid on tips?  In my particular client's case all of the tips are included since the total qualified wages including tips is under $10,000 per qualified employee.

[Drphibes]

Forget what I said in the last response, momentary lapse in memory on how the 8846 credit is calculated.

So when the 8846 credit is deducted from wages as an expense on the S-corp return, is that a deduction from qualified wages for determining ERC?  I'm going with the fact that it has not been specifically mentioned in any of the IRS notices I have seen unless someone has seen something different and not going to deduct it.

Man, after all the IRS notices and such on this subject as new as about 2 weeks ago, my head is spinning.  Took 3 online seminars on this stuff and all 3 were not up to the latest rules and interpretations.  The actual amending the 941's I can put off, but trying to determine the wages used as a business expense for 2020 Fed return so I can get this specific S-Corp filed soon, has been the issue. 

[qbteachmt]

"when the 8846 credit is deducted from wages as an expense"

It's not a deduction of Wages. It's for the FICA Tax Expense:

"use Form 8846 to claim a credit for social security and Medicare taxes paid or incurred by the employer on certain employees’ tips. The credit is part of the general business credit."

"I'm going with the fact that it has not been specifically mentioned in any of the IRS notices I have seen unless someone has seen something different"

Did you not follow what is in my earlier reply, and did you not click the link? There are three notices referred to here, if you want to dive into the details:

https://www.irs.gov/newsroom/treasury-irs-provide-additional-guidance-to-employers-claiming-the-empl...

The qualified tips are considered part of Wages; but the tax paid on the tips are part of the Employer's non-wage cost for the business credit that can be passed through. The ERC cannot be passed through and is calculated on those Wages. It doesn't not affect how employer taxes are being treated.

"but trying to determine the wages used as a business expense for 2020 Fed return so I can get this specific S-Corp filed soon, has been the issue."

Let's make sure we understand Payroll as Wages + Tax.

Gross Wages <== includes amounts held back from employee takehome as the payroll tax the employer sends on, on behalf of the employee; this Gross is part of Payroll expense

Employer Tax Expense <== not Wages, but is part of Payroll expense, because this is all part of labor costs. Other payroll cost would be, for instance, retirement match, tuition reimbursement, health costs, and other benefits, which might be taxable or not.

ERC is based on specific types of Pay. Remember, this has to do with Relief.

FICA tip credit is based on the employer's share of Taxes that are computed on specific types of Tips. Tips come from operations that are not disrupted. The employers' share of taxes is part of general business credits, not relief.

Apples and oranges.

[Drphibes]

Yup, went to another seminar and and also read through the examples on notice 2021-20 that cleared up my misconception on how this all works.  You only reduce wage expense by the ERC that is used as a deduction on the S-Corp return.  Also understand the apples and oranges aspect.  A lot of mis-information out there on ERC.

[qbteachmt]

"You only reduce wage expense by the ERC that is used as a deduction on the S-Corp return."

Because the FICA credit is either taken on the business return or passed through as an income tax credit, as you have always been doing this.