FICA Tip Credit Basics

Restaurant owners can save thousands of dollars in Taxes through the FICA Tip Credit, and they are hoping the industry won’t lose this special credit that restaurants and other food services depend on, which is available exclusively to restaurants and food service establishments.

Restaurateurs are fearful of any changes or modifications in the regulations under the Federal Insurance Contributions Act (FICA) as alterations and loss of the credit would likely create more headaches and less tax leeway for food establishment owners, so awareness of any changes in federal regulation or Internal Revenue Codes (IRC) are a big priority for restaurant owners who use FICA Tip Credit.

Tip Credit Awareness

The most important aspect of the Tip Credit for restaurant owners is making sure that expenses are recorded correctly, particularly in regard to any current or new regulations under FICA.

Owners must also be aware of the tax credit and how it applies to their employees. Restaurant owners have to be ever vigilant of the changes in regard to this credit, which is a top priority for restaurant owners, their waitstaff and food delivery employees.

Under law, tips are seen as income and employers have to pay taxes on tips earned by their food and beverage servers and delivery personnel. The tax credit, fortunately, allows restaurant owners to regain a good portion of the money taken from tips and provides leverage to save substantial amounts of money.

What is the FICA Tip Credit

The tip credit is a reduction in income tax expense and is claimed by the employer on Form 8846 that is titled “Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips” and is filed along with the employer’s federal income tax return.

It is authorized through the Internal Revenue Code (IRC), Section 45(B), which is the FICA Tip Credit that is equal to the amount of the employer’s part of the social security taxes that is currently 7.65 percent on tip income, which is not used to bring the employee’s wages up to the minimum wage. No credit is given for tips used to meet the federal minimum hourly wage rate.

The amount is taken as a business credit on the employer’s corporate return. The credit is calculated through a set (frozen) minimum wage of $5.15 per hour and has not changed because of changes or alterations in federal or state minimum wage scales. It is presently set up this way for purposes of computation, despite the fact that the minimum wage is currently $7.25 per hour.

How the Tip Credit is Applied

The credit is utilized as an income tax credit, which is claimed on the income tax return and can be used to offset any regular tax liability (money owed). This credit is unlike any other business credit as it can be used to offset the amount of tax liability.

Also, if the credit goes beyond the amount of federal taxes owed, the taxpayer cannot receive a refund, though any credits not used can be moved back a year and brought forward for up to 20 years. A taxpayer can also decide to not apply the credit for a certain tax year.

The credit is for reduction of a dollar for dollar decrease in taxes owed by a restaurant owner. An option through an expense deduction would only reduce taxable income. Credits are probably of more benefit, but both a credit and expense deduction cannot be claimed at the same time.

If the credit is claimed and used, social security and Medicare taxes must be adjusted to proper levels. Either one of these actions probably require evaluation with an accounting expert to determine which deduction is of more benefit to a restaurant business with a number of employees.

Restaurant Owner Concerns

Restaurant owners want to make certain that policy makers understand the real goals of the 45(B) FICA Tip Credit. They want the credit to remain a solution to help secure tip income that is under reported as well as emphasize that the credit is not a tax loophole. Further emphasis is made on the fact that tips are paid to waitstaff and delivery personnel by customers, not restaurant owners. Expecting an employer to pay the tax with nothing to offset it would not be fair.

Most Recent Repeal Attempts

Those restaurant owners associated with the National Restaurant Association (NRA) did not agree with the former administration in Washington, D.C. and its 2016 attempts to repeal the FICA Tip Credit.

The administration felt that supporting beneficial tax treatment concerning tips as opposed to other kinds of cash compensation would continue to encourage employers to supplement employee income in the form of tips rather than wages.

The Restaurant Association has continually supported the FICA tip credit and explains that it was not designed to lower wages but rather to compensate employers for the tax they paid on tips, and to make sure tip reporting was inclusive and accurate. They even stated that an April 2015 report suggested that a repeal of the credit would cause under reporting of cash tips by 15 percent and a reduction of 2 percent on credit card tips. See Here.

Administration officials in favor of the repeal believed that the credit would actually cost more than any extraneous effects on complying with tax laws. Also, those supporting repeal noted that only certain employers in restaurant and food services can take this kind of tax credit for the FICA taxes paid on employee tip income. They reiterated that there are fewer industries that receive comparable tax credits and feel that it is not fair to taxpayers who are compliant with tax law and don’t have the option of tax credits or subsidies.

Those in the administration that pushed the 2016 repeal failed in their attempts, much to the relief of those in the food service industries where tips are a supplement to income and a tax relief to restaurants and other food-related businesses, but if another legislative attempt resurfaces with any broad tax reforms in 2017 and beyond, the challenges will remain for restaurant owners and others to defend the FICA Tip Credit.