Author: Sarah Davis

KT Insights
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Properly Reporting Tips

Do your employees receive tips? As tips are becoming more common in businesses other than just restaurants, business owners need to make sure not only is the employee doing their part in recording their tips properly, but the employer as well. Tips come in a couple of different forms and employers need to be aware of how the tips were received by the employee to make sure they are reported properly.

Cash Tips

Customers hand cash to the server, housekeeper, barista, etc. and that employee keeps those tips. At the end of the employee’s shift, they are required to tell the employer the amount of cash tips received for that shift. Employers are to report cash tips on the employee’s paycheck as gross earnings and deduct them from net pay since those monies were already received by the employee. The employee will pay their share of payroll taxes this way, and the cash tips will be included on their W-2 at year end.

Credit Card Tips

If customers leave tips on credit cards, there are a couple of ways those get paid to employees. Some employers take cash out of the till at the end of the day in the amount of those credit card tips and hand the cash to the employee. If that is the case, then those tips would be treated as cash tips as stated above. If an employer totals the credit card tips for the whole pay period and pays them out through payroll, then those tips go into gross earnings and are added to the employee’s net check after taxes are calculated.

In some states, like South Dakota, the state minimum wage is $11.20, but for tipped employees like servers and bartenders, the state minimum wage is $5.60. It is assumed the tips received will increase the employee’s earnings to at least $11.20 per hour. Most tipped employees do make at least, if not more than, minimum wage during their shift, but employers need to confirm that based upon the hours worked that their employees earn enough.

Examples:

Employee A works 10 hours at $5.60 per hour and earns $100 in tips. Total gross earnings are 10 hours x $5.60 = $56, plus $100 in tips = $156 in total gross earnings. Divide the gross earnings of $156 by the 10 hours worked and the employee made $15.60 per hour, which exceeds the $11.20 per hour requirement.

Employee B works 10 hours at $5.60 per hour and earns $50 in tips. Total gross earnings are 10 hours x $5.60 = $56, plus $50 in tips = $106 in total gross earnings. Divide the gross earnings of $106.00 by the 10 hours worked and the employee made $10.60 per hour, which is less than the required $11.20 per hour. In this case, the employer would need to increase the employee’s gross earnings by $6 to make $112 total gross earnings or $11.20 per hour earned.

In Employee B’s example, their employer has to add $6.00 to ensure the employee is paid minimum wage. That amount is typically shown as a separate pay item as “Tip Make Up” or something similar, to differentiate it from the other pay items.

Each state has different minimum wage requirements and researching the rules in the state the employee is working is encouraged. Regardless of the state rules, minimum wage must be paid. For businesses with tipped employees, it is beneficial to ask about the Tip Credit that is available on the business tax return. Look for more information on that credit in a future KT Addition or on KT’s blog.

The payroll team at KT can assist with questions on how to properly report tips as well as any other payroll questions you may have.

June 17, 2024
| Sarah Davis
KT Insights
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The Employee Retention Tax Credit Updates

In the last KT addition, we talked about the Employee retention credit and if it was for you. Since that time the IRS has issued notices and Congress is working on passing bills, but as of today the employee retention tax credit is still available for 2021 and could be a great benefit to your business.

The big news is that there is a new way to qualify without any reduction in revenues. Read below regarding a supply chain disruption.

Executive Summary – The Employee Retention Credit (ERTC) is here to help small business negatively impacted by Covid-19. The ERTC is a fully refundable payroll tax credit.

  • For 2020 small employers who received the Paycheck Protection Program (PPP) funds are now allowed to also claim the ERTC. Employers qualify if they were fully or partially shut down by governmental order or if they had a greater than 50% drop in gross receipts for a quarter compared to the same quarter in 2019. The maximum wages allowed are $10,000 per employee, for the year, with a 50% credit on those wages up to $5,000 per employee.
  • For 2021, the ERTC is expanded to allow small employers to qualify with a greater than 20% drop in gross receipts (2021 Qtr. to 2019 Qtr.), $10,000 of wages per quarter per employee can qualify and the credit on qualifying wages is increased to 70%. At $7,000 per employee, per quarter an employer potentially could receive $28,000 per employee for 2021. 
  • Recent Updates:
    • IRS has clarified rules for more than 50% owners, stating that in majority of cases more than 50% owners and their spouses do not qualify.
    • If you qualified for a quarter in 2021under the revenue test, you automatically qualify in the next quarter. 
    • There is a Bill in the works that will end the credit as of September 30, 2021, meaning that 4th quarter of 2021 would no longer be an applicable quarter for the credit. Ketel Thorstenson, LLP will send an update if this does pass.
    • Your business will qualify for ERTC during a calendar quarter in which it experienced a supply chain disruption caused by a government order affecting a supplier that caused the supplier to suspend shipment. The disruption must have affected a “more than nominal portion” of your business, causing a full or partial suspension of business. The credit is earned in the quarter in which your business was fully or partially shut down. For purposes of this test, a more than nominal portion of the business must be a portion of the business that represented 10% of the total Company revenues in a calendar quarter when compared to 2019. Another way is that the affected portion of the business represented 10% of the total company labor hours in 2020/2021 calendar quarter as compared to 2019. You will need to document how you know the US supplier was disrupted by the Government order.
  • There is an opportunity for a business that began operations after February 15, 2020, to qualify for the employee retention credit, referred to as a Recovery Startup Business. A Recovery Startup Business will not have qualified under the reduction of gross receipts or the partial or full shutdown due to governmental orders, however the average annual gross receipts for three years preceding the quarter which the credit was taken cannot exceed $1 million. 

The Employee Retention Tax Credit can be a game changer for your business, unfortunately it is very complicated. Ketel Thorstenson, LLP is ready to help you determine if you qualify, assist with wage calculations including segregating wages for ERTC from wages used in the PPP loan forgiveness and finally we can prepare the Forms necessary to receive the credit.  

September 2, 2021
| Sarah Davis
KT Insights
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NEWS FLASH – THE EMPLOYEE RETENTION TAX CREDIT – IS IT FOR ME?

  • For 2020 qualifying employers can receive up to a $5,000 credit per employee.
  • For 2021 qualifying employers can receive up to a $28,000 credit per employee.

Executive Summary – Congress recently extended and enhanced the Employee Retention Credit (ERTC) to help small business negatively impacted by Covid-19.  The ERTC is a fully refundable payroll tax credit.

  • For 2020 small employers who received the Paycheck Protection Program (PPP) funds are now allowed to also claim the ERTC.  Employers qualify if they were fully or partially shut down by governmental order or if they had a greater than 50% drop in gross receipts for a quarter compared to the same quarter in 2019.  The maximum wages allowed are $10,000 per employee, for the year, with a 50% credit on those wages up to $5,000 per employee.
  • For 2021, the ERTC is expanded to allow small employers to qualify with a greater than 20% drop in gross receipts (2021 Qtr. to 2019 Qtr.), $10,000 of wages per quarter per employee can qualify and the credit on qualifying wages is increased to 70%.  At $7,000 per employee, per quarter an employer potentially could receive $28,000 per employee for 2021. 

The Employee Retention Tax Credit can be a game changer for your business, unfortunately it definitely has its complications.  Ketel Thorstenson, LLP is ready to help you determine if you qualify, assist with wage calculations including segregating wages for ERTC from wages used in the PPP loan forgiveness and finally we can prepare the Forms necessary to receive the credit.  

In short, if you qualify, the Employee Retention Tax Credit is potentially huge and Ketel Thorstenson, LLP can help you to take advantage. 

If you have questions, email the experts at KTLLP.
ERTC Team:
Sarah Davis: [email protected]
Nina Braun: [email protected]
Todd Hoese: [email protected]

April 9, 2021
| Sarah Davis
KT Insights
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2020 W2 Updates: Employee Social Security Deferment and FFCRA Wage Reporting

When it sounds too good to be true, that is most likely the case.  Beginning September 1, 2020, willing employers were able to defer withholding the employees’ portion of Social Security tax in an attempt to keep more money in employees’ pockets during the pandemic.  Social Security tax could be deferred from employees’ checks paid during September 1, 2020 to December 31, 2020, with the intention of collecting that deferred tax from employees’ checks from January 1, 2021 to April 30, 2021.  From an accountant’s standpoint, this sounds like a paperwork and tracking nightmare, along with hesitation on the client’s standpoint – who knows if those employees will still be around come 2021 to recoup that tax?

No one likes a bad honeymoon – the IRS published on October 29, 2020 how the recouped Social Security tax should be reported once it is collected during January 1, 2021 and April 30, 2021, which is filing a 2020 W2c for any affected employee.  Guidelines state that the 2020 W2 should have all wages reported as paid, but box 4 housing the Social Security tax withheld should only show the tax that was truly collected in 2020, which makes sense and would be what software should populate for reporting purposes.  The fun part is that as soon as possible in 2021, when the tax has been recouped by the employees, a form W2c needs to be filed to report the 2020 tax collected in 2021. 

Luckily, one of the more prominent issues with these guidelines has been averted, since there is no reason to wait for the W2c or amended Form 1040 after it has been filed if the employees taxable wages do not exceed the $137,700 Social Security wage limit.  If an employee works two jobs and is over the $137,700 limit, they will want to wait for the W2c or amend the 1040 after filing to get any excess tax paid in refunded.  It is up to the accountant’s and employers to make sure that employees are aware of why they are getting a W2c and what they should do with it after receiving.

The other prominent issue would be, at this point, the employer is responsible for any portion of Social Security tax not recouped from the employee if the employee terminates employment prior to the employer collecting the tax.  There has not been further guidance on this issue, and Ketel Thorstenson, LLP will continue to watch and report any changing guidelines as they are issued.  Please follow us on our website for trending and ongoing issues as well as the latest changes in guidelines. 

In addition to Social Security Deferment, were FFCRA COVID wages paid to employees in 2020?  If so, the detail of those wages is required to be reported in Box 14 of the W2 for 2020.  The IRS is asking for the following: if the wages were “Sick leave wages subject to the $511 per day limit,” “Sick leave wages subject to the $200 per day limit,” or “Emergency family leave wages,” along with the dollar amount that was paid under those categories.  This will be an item that will most likely have to be manually input on the W2, unless the software companies get an update pushed out to automatically do this, along with the wages items being setup properly to pull on the form when they do.  The hardest part about getting this information on the form is that the IRS is asking for a similar description to the ones listed above to be listed in the box, but there is not room for that much language in that area.  Suggestions would be to put “Sick $511,” “Sick $200,” or “QFLW” to get the language to fit on the form.

January 7, 2021
| Sarah Davis
KT Insights
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Paying South Dakota Use Tax

Do you need to pay South Dakota use tax on that?  Use Tax can be a tricky subject, but luckily in South Dakota there are some fairly straightforward rules.  Since South Dakota does not have a state income tax, generally most products and services are subject to sales or use tax.

What is use tax? Use tax is calculated on the amount of a purchase, whether for goods or services, paid to a vendor that did not include sales tax on the invoice..  Use tax calculations in South Dakota are based upon where the product or service is being used.  For example: Amazon ships office supplies to your business in Black Hawk – since Black Hawk is only “state” taxable, the office products need to be taxed at 4.5%. Another example: you have tools shipped to your home in Black Hawk, but the tools will be used at a worksite in Rapid City – those tools need to be taxed at 6.5%, which includes 2% city tax.

What does this mean for you as a business owner?  It means you should check all receipts and invoices received to verify whether or not tax was included.  This is particularly true for online purchases.  For example, Amazon is supposed to be charging sales tax on all purchases sent to South Dakota addresses, however, that does not mean the process has been completely implemented.  Amazon is one of the most commonly used internet vendors, and they may not always charge sales tax.

Which types of products and services should you be looking for?  Straight answer: generally all.  Unless your business is using a product for resale, or you have a special exemption certificate, all products and services are taxable.   Examples:  Having your income taxes prepared – the service is taxable.  Picking up a load of office supplies from the store down the street – the products are  taxable.  Renewing a subscription online or via mail – they are taxable.  If something was taken out of inventory for use within your business or for personal use – that item is taxable as well.

Anything purchased for use within South Dakota, regardless of whether it was purchased online or in another state, South Dakota sales tax will need to be paid for it. If it doesn’t show tax charged on the invoice, you will need to report it as a use taxable item on your sales tax return.  Again, there are exceptions to the rules, but there are very few.

If you have questions on use tax, please refer to our website at www.ktllp.cpa for a couple of reference guides from the state of South Dakota, they are also listed below.  You can also contact our Accounting Services Department at Ketel Thorstenson for additional questions.

SD Use Tax Publication https://dor.sd.gov/Taxes/Business_Taxes/Publications/PDFs/Tax%20Facts/Use%20Tax.pdf

SD Use Tax Form and instruction https://state.sd.us/eforms/secure/eforms/E1350V10-UseTaxForm.pdf

Use Tax Rate Finder by Address https://apps.sd.gov/rv25taxmatch/main.aspx

September 19, 2017
| Sarah Davis