The FICA Tip Credit

Employees in the restaurant industry are required to report monthly tips in excess of $20 to their employers. Employers are in turn required to pay the employer’s share of employment tax on the tips as well as withhold the employee’s share of Social security and Medicare taxes from their paycheck.

The FICA Tip Credit provides relief to businesses paying employment taxes on tip income. Calculation of the credit is somewhat complex, requiring employers to determine an amount known as “creditable tips.” The creditable tips figure removes the tip income that covers the difference between the employee’s hourly wage and the minimum wage.

A few important notes:

• The credit is limited to the restaurant industry, other tipped industries such as salons and beauty parlors are not eligible

• If the state minimum wage is higher than the federal minimum wage, the higher rate applies.

• The credit is claimed on Form 8846 Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. This form is filed as part of the business’s income tax return (as opposed to its quarterly federal payroll tax return).

Schreiber Accounting and Advisory can help you take advantage of the FICA tip credit with comprehensive tax planning and preparation services for small businesses. Contact the firm for more information.

Material discussed is for informational purposes only. It is not to be interpreted as investment, tax, or legal advice. Individual situations vary, and this information should only be relied upon when coordinated with individual professional advice.