The FICA Tip Tax Credit: An Often Overlooked Tax Benefit
Restaurant and bars pay a significant amount of taxes. This includes paying FICA or payroll taxes. Congress provided an income tax credit to help mitigate the impact of the high payroll taxes these businesses incur. Unfortunately, many restaurant and bars do not know of or take this tax credit.
About FICA TaxesThe Federal Insurance Contributions Act (*FICA*) requires employers pay Social Security and Medicare taxes and to withhold these taxes from wages. These FICA taxes are commonly referred to as payroll taxes or employment taxes.
FICA taxes are computed based on the amount of wages paid to employees.
In addition to wages, FICA taxes are also imposed on tips employees receive. This includes tips received in cash and by credit card.
Deducting FICA Taxes on Tips vs. Taking the FICA Tip Tax CreditIn computing its income tax, the employer can then deduct the amount of FICA taxes paid.
In the alternative, the employer can elect to take a FICA tip tax credit in lieu of deducting the FICA taxes paid on tip income. The credit only applies to the extent total compensation exceeds the greater of the Federal or state minimum wage for hours worked.
To qualify, the taxpayer has to have (1) had employees who received tips from customers for providing, delivering, or serving food or beverages for consumption and (2) paid or incurred employer Social Security and Medicare taxes on the tips.
The FICA tip tax credit is reported on a Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. The tax credit then offsets income taxes. It does not offset employment taxes.
The FICA tip tax credit is not refundable (i.e., it can only offset your tax liability, not produce a tax refund in excess of amounts paid in). Unused credits carryback one year and forward twenty years.
Get Help with Your FICA Tip Tax CreditsIf you own or operate a restaurant or bar, you may be entitled to take a FICA tip tax credit. You may be able to go back and claim credits for prior years. Call today to see how we can help, (832) 915-1040.