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FICA Tax Credits on Employee Tip Wages

Do your employees receive tips on the services they provide? If so, there may be a tax credit you can take advantage of.  


The FICA Credit

This credit applies to tips received from customers for food and beverage purchases. Although tips are paid by customers, for FICA purposes, they’re treated as pay earned and paid for by the employer. As you know, your employees are required to report their tips to you, and as the employer, you must: 

  • Withhold and remit the employee’s share of FICA taxes,

  • Pay the employer’s share of those taxes

How to Claim the Credit

In a nutshell, the credit is claimed as a general business credit. The credit amount is equal to the employer’s share of FICA taxes paid on and employee's tips in excess of what’s needed to bring your employee’s wages up to $5.15/hour. However, if you pay each employee at least $5.15/hour (excluding tips), you don’t have to be concerned with this calculation. 


Note: The minimum wage is now $7.25/hour but the amount for credit computation purposes remains at $5.15. 


Let’s say a server at your restaurant is paid $2.13 an hour plus tips. During the month, she works 160 hours for $340.80 and receives $2,000 in cash tips which she reports to you. The server’s $2.13/hour rate is below the $5.15 rate by $3.02/hour. Thus, for the 160 hours worked, she is below the $5.15 rate by $483.20 (160 multiplied by $3.02).  


Therefore, the first $483.20 of tip income will bring her up to the minimum rate. The remaining tip income of $1,516.80 ($2,000 minus $483.20) is used to compute the FICA taxes paid on the employee. The FICA tax rate is 7.65%. Therefore, your employer credit is $116.03 for the month ($1,516.80 multiplied by 7.65%). 


While the employer’s share of FICA taxes is generally deductible, the FICA taxes paid with respect to tip income can’t be deducted, because that would be considered a double benefit. You can, however, elect not to take the credit, in which case you can claim the full deduction. 


 

If your business pays FICA taxes on your employee's tip income, the tip tax credit may be valuable to you. Other rules may apply, but make sure to contact your VAAS Tax Consultant to calculate the credit or to address any questions you may have. 

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