Is your company in the Food & Beverage Industry? Do you have tipped employees? If so, you need to make sure you are taking advantage of the FICA Tip Credit. This can add up to hundreds of dollars depending on the size of the company, number of employees, and tipped dollar amount. Make sure that whoever is doing your payroll knows about and is calculating this credit.
What is the FICA Tip Credit?
The FICA Tip Credit is a business tax credit the IRS allows business owners in the Food & Beverage Industry to take on the Social Security & Medicare taxes the company pays on reported tipped employee income above the minimum wage rate.
What requirements must be met?
According to the IRS there are two requirements that must be met:
- You had employees who received tips from customers for providing, delivering, or serving food or beverages for consumption; and
- You paid or incurred employer Social Security and Medicare taxes on these tips.
How is the Credit calculated?
Although the IRS only says there are two requirements for the credit, they also go on to explain that the credit is only on amounts above the minimum wage requirement. The federal minimum wage for 2011 is $7.25/hr, however the minimum wage for this credit calculation is $5.15. If a business owner is paying his wait staff $3.25/hr and they turn in tip income of $6/hr, then the business owner is entitled to calculate the FICA Tip Credit on the extra $4.10/hr ($3.25+$6.00=$9.25 – $5.15 = $4.10). The employer portion of Social Security & Medicare is 7.65% of the wages, so depending on the actual wages for the full year above the minimum wage requirement and number of employees falling into this category the Credit can add up fast. The amounts over the minimum wage requirement are then put on form 8846.
Because the FICA Tip Credit is a tax credit, the deduction that you took for the payroll taxes must be added back to income. This is to prevent double dipping of both the credit and deduction. Tax credits are a dollar for dollar tax reduction, and deductions just reduce taxable income. Therefore, taking this credit helps you benefit more. This Credit doesn’t need to be money just left on the table, make sure whoever is doing your payroll is calculating it properly.
For more information, please give us a call 770-856-1309 or email us at info@joshuawilsoncpa.com.