2020 Employee Retention Credit affect on S-Corp wage deduction

Forum|Forum|4 years ago
August 20, 2021
2 replies
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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!

Lacerte Tax

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George4Tacks

Level 15

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

Answers are easy. Questions are hard!

qbteachmt

Level 15

"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.

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DrphibesAuthor

Level 6

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

Level 15

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-the-employee

"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."

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