Utilizing the FICA Tip Tax Credit

It’s not new news that the pandemic has been tough on restaurants. If you own a business where tipping is customary for providing food or beverages, you may be able to offset some of your income tax liability by claiming the federal FICA tip tax credit. Even though tips are paid by customers, they’re considered employer-paid for FICA tax purposes. Employers are responsible for withholding 7.65% from the employee’s wages and tips as well as paying the employer portion of those payroll taxes.

The tip credit is equal to the employer’s side of FICA taxes paid on tip income above the amount needed to bring an employee’s wages up to $5.15 per hour. Even though the federal minimum wage is currently $7.25 per hour, the FICA tip credit calculation is based on a fixed rate of $5.15 per hour. If you already pay your employees at least $5.15 per hour, you can disregard this calculation:

You have an employee who is paid $2 per hour plus tips. During the month, he works 160 hours and is paid $320. He also reports tips of $2,000. Because the employee is paid less than $5.15/hour, his tip income is first used to bring his wages up to that level – 160 hours times $3.15 equals $504. The employer side of FICA taxes paid on the remaining $1,496 of tip income can be claimed for the FICA tip tax credit of $114.44 ($1,496 times 7.65%).

The FICA tip tax credit is included on the employer’s tax return as part of the General Business Tax Credit, which is a nonrefundable credit that can’t reduce a tax liability below $0. Unused portions of the credit can be carried forward to future years. If you have questions about the FICA tip tax credit, please give us a call.