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:
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: