If you are an employer in the restaurant industry, you may be eligible for a tax credit for the Social Security and Medicare taxes you pay on your employees’ tips. This credit is called the FICA Tip Credit, and it can reduce your income tax liability dollar for dollar.
What Is The Credit?
The FICA Tip Credit is a nonrefundable tax credit that allows employers to claim a portion of the FICA taxes they pay on their employees’ tips as a credit against their income tax. The FICA taxes consist of Social Security and Medicare taxes. Typically, the employer and the employee share these taxes equally. Employers must collect a written statement from each employee who receives tips of $20 or more in a calendar month, showing the total amount of tips received. This statement is due by the 10th day of the following month. Based on these statements and the employer’s records, the employer has to do the tips reporting.
You can use the FICA Tip Credit to offset some of your burden of paying these taxes. You can claim the credit only for the tips received in regards to providing, serving and/or delivering food.
The credit is equal to the employer’s share of FICA taxes paid on tips in excess of the tips used to meet the federal minimum wage in effect as of January 1st, 2007 of $5.15. For example, considering that the federal minimum wage taken into consideration for the FICA tip credit is $5.15 per hour, and an employee earns $4 per hour in wages plus $5 per hour in tips, the employer can claim a credit for the FICA taxes paid on $3.85 per hour of tips for this particular employee.
How To Claim The Credit?
To claim the FICA Tip Credit you should file Form 8846. To file Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, you must meet the following requirements:
- you must have employees who receive tips from customers for providing, delivering or serving food or beverages for consumption,
- you must pay or incur employer Social Security and Medicare taxes on these tips during the year.
On Form 8846, you must report the following information:
- the total amount of tips received by your employees on which Social Security and Medicare taxes were paid or incurred,
- the tips not subject to the credit provisions (only if you pay any tipped employee wages (excluding tips) less than $5.15 for 2022),
- the creditable tips by subtracting the tips not subject to the provisions from the total amount of tips received,
- FICA Tip Credit from partnerships and S corporations.
Special Situations
In addition, you should pay attention if you had any employees who received tips, and their salary including tips exceeded the social security tax wage base (for example for 2023 the social security tax wage base is $160,200). If this happens you have to attach to the form separate calculations for the tips credit (for the details of these calculations, please see the instructions for Form 8846).
The amount of credit you can claim is limited by your income tax liability. If your credit exceeds your tax liability, you have to carry the excess back 1 year and if you still have excess, you can carry it forward 20 years.
In conclusion, if you are an employer who pays FICA taxes on your employees’ tips, you should consider claiming the FICA Tips Credit.
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This material is for informational purposes only. It does not constitute tax, legal or accounting advice.