If you run a restaurant or other food & beverage business, you can claim FICA tip tax credit that can potentially saves you thousands of dollars each year.
What is the FICA tip credit?
Employers with employees who earn gratuities are required to pay payroll taxes on the tips their employees collect from customers, as the tips are considered income under FICA. But restaurant employers may receive an incentive for accurately reporting their workers’ tip earnings: an income tax credit called the FICA tip credit.
Restaurant employers can include the tips into employees’ income to meet the minimum wage requirements. If the amount of tips exceeds the federal minimum requirement, restaurant employers may be eligible for a partial tax credit. This credit equals the employer’s portion of the FICA tax, which is currently 7.65%, multiplied by the tips in excess of the federal minimum wage.
Who does it apply to?
The FICA tip tax credit is only available to employers in the food and beverage industry that have a tipped workforce. Businesses in other industries are not eligible to claim this credit.
To be eligible for the credit, restaurants must determine that all non-exempt employees are compensated at least the federal minimum wage for hours worked. If the state where the restaurant resides has a higher minimum wage rate, the higher wage applies. Compensation may be totaled from different types of compensation received, such as hourly wages, tips, and gratuities that the staff member records, and meals that the restaurant provides to the employee.
Employees must keep an accurate record of daily tips, whether they come in the form of cash or credit card. A total must be provided on an annual basis to the employer. This reported total is then used as the basis of income tax recording, Social Security payments, and other withholdings. Restaurants must follow up with employees as required to ensure this information is received.
How Do You Calculate the FICA Tip Tax Credit?
Here’s an example of calculating FICA tip credit:
A restaurant waiter earns $2.50/hour, works 30 hours a week, and reports $350 tips a week. Although the federal minimum wage has since been raised to $7.25/hour, the FICA tip credit will continue to be based on the old minimum wage of $5.15/hour (when the credit was enacted, the Small Business and Work Opportunity Tax Act of 2007).
First, calculate total weekly income of the waiter:
$2.50 × 30 + $350 = $425
Next, calculate the minimum wage:
$5.15 × 30 = $154.50
Now, subtract the first value ($425) by the second value ($154.50) to find the amount of tips in excess of minimum wage:
$425 — $154.50 = $270.50
Multiply that number by the employer’s portion of the FICA tax to determine the tax credit:
$270.50 × 7.65% = $20.69
Although the credit $20.69 does not seem like a lot of money, if the waiter consistently works the same amount of hours and earns the same amount of tips for 52 weeks, the potential annual savings could be $1,075.88. And if the restaurant has 20 waiters, it could save $21,517 in a year.