Thread by @danchodan

You have run out of wages to maximize ERC and PPP.

Before giving up, consider creating more wages by using an estimate of tips paid.

The same wages cannot be used for both the ERC and PPP relief programs. So maximization can be hard. But significant differences in the two programs make opportunities to be creative.

One particular area of confusion has been tips. Some practitioners have gone as far as not claiming any tips for either program. I believe that is a mistake.

It's unlikely that we will get any further guidance on tips. Time to move forward with what we have.

PPP guidance specifically allows for tips in the definition of wages and even allows "a reasonable, good-faith employer estimate of such tips."

We find this language in an IFR on eligible wages for calculating a loan amount, the IFR on forgiveness wages, and the applications.

Here are the PPP sources:
home.treasury.gov/system/files/1…

home.treasury.gov/system/files/1…

sba.gov/sites/default/…

So what does this mean?

Well, tips can be a powerful tool in maximizing ERC and PPP. Some of the hardest hit businesses are in industries with significant tips. This includes restaurants, bars, salons, hotels, cruises, tour busing, and more.

How does a business create more wages by using an estimate of tips paid?

For PPP, this is allowed if it's a "reasonable, good-faith employer estimate". Assuming tips equal 50% of restaurant sales would likely be unreasonable, but perhaps 15-20% of sales would be normal.

The type of business will dictate the type of estimate that is reasonable. Management likely has a very good idea of what their tips look like on average.

In some cases it may be best to determine a percentage of credit card tips to credit card sales and apply it to cash sales.

In other cases an estimate of percentage tips to total sales may be more realistic.

There may even be times to consider a per unit tip estimate such as per hotel room nights, per table average, or others.

By going through this exercise, tips can be estimated and hopefully close the gap to maximize PPP and ERC.

Remember, additional wages that are eligible for PPP will free up other wages for ERC (similar to using nonpayroll costs for forgiveness).

But what about using tips for ERC?

Notice 2021-20 is the key ERC guidance and defines wages under 3121(a).

A neat summary of the code is found in Rev. Rul. 2012-18. This points to wages including tips for ERC purposes.

Some have expressed concern from Notice 2021-20's statement that wages must be "paid by the eligible employer". Are tips paid by the employer or by the customer? 3121(q) speaks to this by indicating tips are deemed to have been paid by the employer.

If you still can't get comfortable with tips for ERC, at least you can use tips for PPP forgiveness and free up other wages to be used for ERC.

Maximizing ERC is easier in 2020 with annual $10,000 per employee caps. In 2021 those caps switch to quarterly, and we are far more likely to run out of wages.

If you do run out, don't forget about estimating tips for PPP. #TaxTwitter