In contrast, cash tips, are paid by customers rather than by employers. As we have discussed previously, qualified wages for purposes of the employee retention credit are wages (as defined in Section 3121(a) of the Code) and compensation (as defined in Section 3231(e) of the Code) that are paid by an eligible employer to some or all of its employees. Nonetheless, the decision is a welcome one to employers with tipped employees. The IRS’s decision to include cash tips in qualified wages is surprising in light of the IRS’s prior determination that remuneration in excess of the Social Security wage base could be included in determining qualified wages even though such amounts were excluded from the definition of “wages” under section 3121(a). In Notice 2021-49, the IRS concedes that cash tips received by employees from customers should generally be treated as qualified wages, and bases that conclusion on the Internal Revenue Code’s inclusion of cash tips greater than $20 a month in the definition of wages and compensation under Sections 3121(a)(12) and 3231(e)(3), respectively, as well as Section 3121(q), which deems tips received by employees as wages paid by the employer for purposes of subsections (a) and (b) of Section 3111 (the employer share of FICA taxes). Cash Tips May Be Treated as Qualified Wages The Service has also outlined a safe harbor that employers may apply to exclude from gross receipts the amount of the forgiveness of any PPP loans or the amount of shuttered venue operator grants or restaurant revitalization grants. The latest guidance takes the form of Notice 2021-49 and Revenue Procedure 2021-33, which together address a range of topics, including how employers should treat cash tips for purposes of determining the amount of qualified wages, whether the credit may be claimed with respect to the same wages for which the employer receives the Code Section 45B credit, how the related individual rules work for determining qualified wages, and whether employers are required to file amended tax returns if they claim the employee retention credit retroactively. Nearly 18 months into the pandemic, the IRS continues to issue guidance on the employee retention credit, a credit that was adopted in March 2020 and has been addressed in a number of articles on the Tax Withholding & Reporting Blog, most recently on August 3, 2021.
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