How you can cash in on the FICA tip credit

Q Does my restaurant qualify for the FICA tip credit?

A The IRS Section 45B tax credit is available to employers who operate a food or beverage establishment where tipping is customary and where food or beverages are served either on or off premises for consumption. Also known as the tip credit, it provides a means of recovering FICA taxes that you’ve paid on tips in excess of the minimum wage. This credit can save you hundreds of dollars per employee each year, but you have to request it on your tax returns.

As the employer, you must compile the employee payroll records needed to prepare IRS Form 8846, “Credit for Employer Social Security and Medicare Taxes Paid On Certain Employee Tips.” This includes quarterly and year-to-date totals for tips, tips-to-minimum calculations and FICA tax credits.

For you to qualify for this credit, all of your nonexempt employees must make at least the federal minimum wage. In states with a minimum wage that’s higher than the federal minimum wage, the higher wage applies. An employee’s compensation may be totaled from different types of payment received, such as hourly wages, tips and gratuities that the employee records, plus meals provided by the restaurant to the employee. Employees must keep an accurate record of daily tips, whether paid by cash or credit, and provide you with a total amount annually. It’s your responsibility to make sure they give you the information you need.

Your restaurant accountant should include the tip credit in annual tax filings, but you may want to make sure Form 8846 has been attached to your return. If not, reach out to your accountant right away!

Another tax credit to keep in mind is the federal work opportunity tax credit, which encourages employers to hire new employees from “targeted groups,” such as food stamp recipients between 19 and 39 years old, veterans receiving food stamps and vocational rehabilitation referrals. The credit ranges from $2,400 to $9,000 per qualified employee.

Other available credits include federal and state empowerment zone credits; renewal employment credits; federal Indian employment credits; state point-of-hire credits; and state training and retraining credits.