Tips are common in the food and beverage industry, and restaurants are required to pay FICA and Medicare taxes on tips their employees receive from customers. To offer some financial relief for these employers, restaurants have an opportunity to claim the FICA tip credit. This credit goes against their federal income tax based on the share of employment (FICA) taxes they pay on tip income that employees report. Below we discuss more about the credit, including how it’s calculated and if automatic service charges are eligible.
What is the FICA tip credit?
The FICA tip credit is a general business tax credit available to food and beverage establishments for the social security and Medicare, also known as FICA, taxes they pay on their employees’ tip income. This is claimed on Form 8846: Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. This is a big opportunity for restaurants and it’s important to claim this credit even if you don’t think you can benefit this year. Any unused credit can be carried forward up to 20 years until it is completely utilized.
How is the credit calculated?
Since it’s common for tipped employees to earn less than minimum wage, the FICA tip credit is equal to the employer’s portion of FICA taxes that have been paid on tip income in excess of the federal minimum wage. The tip credit is only permitted to be calculated on tips that are above the amount to bring the employee’s wage up to the federal minimum wage.
For this credit, the minimum wage is set at $5.15 and is not affected by any increases. If the employer pays its tipped employees a base wage of $5.15 or more, the FICA tax credit equals reported tips multiplied by 7.65%.
How are automatic service charges treated?
Automatic service charges, also referred to as automatic gratuities, are set fees determined by the restaurant to be added to the bill of a party. Automatic gratuities are not considered tips, so they must be treated like regular wages paid to an employee. These automatic charges cannot be considered when determining the FICA tip credit. Since the FICA tip credit can save restaurants a substantial amount of money, tips are often more favorable than automatic gratuities when considering the tax benefit.
Do you have questions about the FICA tip credit or tax filing for your establishment? Anders has Lodging, Food and Beverage advisors that can work with you on tax planning, business decisions and analysis of restaurant operations and cash flow. Contact an Anders advisor below to learn more.All Insights