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FICA Tip Credit Can Save a Restaurant Thousands in Taxes

Industry must not lose this credit to tax reform

The FICA Tip Credit, available only to owners of food and beverage establishments, can save a restaurant owner thousands of dollars per year.  Regarding the credit, a restaurateur has two responsibilities:

  1. Become familiar with and utilize the credit if applicable to your business, and
  2. Prevent repeal of the credit in any future reform of the tax code

The credit, a dollar-for-dollar reduction in federal income tax expense, is claimed on Form 8846 (Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips) which is filed with the restaurant’s federal income tax return.  Authorized by Internal Revenue Code Section 45B, the FICA Tip Credit equals the amount of the employer’s portion of social security taxes (currently 7.65%) on tip income not used to bring the employee’s wages up to the minimum wage.  For purposes of calculating this credit, the minimum wage is capped at $5.15 per hour – the rate in effect at January 1, 2007.

A simplified example can serve to illustrate the credit calculation.  Sally, a server, averages 40 hours per week and averages $15.00 per hour in tips.  Her employer pays her a wage of $3.825 per hour (50% of the state’s minimum wage) as required by Missouri law.  Sally’s total tip income for the week is $600.00 (40 hours X $15 per hour).  Tips required to bring her wages up to the minimum is $53.00 (($5.15 – $3.825) X 40 hours).  Tip income in excess of the amount required to bring her wages up to the minimum wage is $547.00 ($600.00 – $53.00).  The FICA Tip Credit available to her employer for this week is $41.85 ($547.00 X  7.65%). Assuming Sally works 50 weeks during the year, the annual FICA Tip Credit would equal $2,092.50.

Now, multiply this credit of $2,092.50 by the number of tipped employees in your restaurant, and you can readily see the importance of the FICA Tip Credit.  MRA encourages its members to seek the guidance of a competent tax advisor regarding the credit.

As revisions to the federal tax code are considered, the restaurant community must ensure Congress understands the legitimate public policy goals of the Section 45(B) FICA Tip Credit, an employer-based solution to help capture under-reported tip income.  It is not a tax loophole.  After all, tips are paid to employees by customers, not employers.  To expect the employer to pay the tax with no offsetting credit would be unfair.

Notes on the FICA Tip Credit:

  1. A 1977 law required employers to pay the employer share of FICA taxes on the employee’s tips, but only on amounts up to the federal minimum wage. This ceiling was removed in 1987, and consequently, employers were required to pay the employer’s portion of FICA taxes on all tips.  The FICA tip credit was enacted in 1993.
  2. The Small Business Work Opportunity Act of 2007 froze the minimum wage used in the calculation of the credit at $5.15 per hour. The calculation is not changed for subsequent changes in the federal or state minimum wage.
  3. Double dipping is not allowed. The employer’s deduction for FICA tax expense must be reduced by the amount of the FICA Tip Credit.  Generally, a tax credit is of greater benefit than a tax deduction.
  4. Unlike most other business credits, the FICA Tip Credit can be used to offset 100% of the alternative minimum tax.
  5. If the credit exceeds the federal tax liability, the taxpayer cannot receive a refund; however, unused credits can be carried back one year and carried forward up to 20 years.
  6. The Obama Administration has proposed to repeal the FICA Tip Credit since its FY 2016 Budget.

Author: MRA
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