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The tax credit that most restaurant owners are due, but most aren't using-FICA Tip Credit

  • Payroll
  • Article
  • 6 min. Read
  • Last Updated: 08/12/2013

fica tip credit
Many restaurant owners are unaware of the FICA Tip Credit and how it can reduce taxes due on the tips that servers receive from patrons. Learn more

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Running a restaurant requires many things - hard work, patience, a willingness to succeed and exceptional communication skills are just a few. When operating a dining establishment, owners have to be sure they are meeting customer demands, maintaining control over inventory and effectively managing finances, among other factors. Overseeing accounts and making sure that expenses and other financial factors are under control are perhaps among the most important tasks for restaurant owners.

A crucial component of maintaining accurate accounts involves correctly recording employee wages and ensuring workers are accurately paid, but this responsibility is complicated by the tips that servers receive from patrons. Employers are required by law to pay taxes on these tips, seeing as they are defined as income under the Federal Insurance Contributions Act (FICA). Both employees and businesses must pay FICA taxes on tips, which can sometimes be a headache for restaurant owners.

Fortunately, although it is not widely known and leveraged, there is a tax credit from which restaurants can benefit with regard to the payroll taxes they dole out for employee tips.

Save hundreds on each employee

Restaurant owners have to request this tip credit on their business tax returns, which may explain why many do not take advantage of it. The credit, formally known as the "Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips," allows owners to save hundreds of dollars each year for every employee who correctly reports his or her tips. Add up all servers and staff, and the savings that are recovered could be significant.

It's easier to break this down into an example using one employee. Steve is a server for a restaurant and makes $2.13 per hour plus tips, working an average of 30 hours each week. He normally receives slightly above $250.00 in tips every week, and each dollar is viewed as income, meaning that Steve's employer must pay the FICA tax of 7.65 percent on each dollar. However, doling out this tax may not seem fair to the restaurant, as it does not receive any benefit from the money given to the server from diners, and the owner was not the one who made the decision to provide Steve with the tip.

The FICA tip credit was created so businesses that employ staff members who earn tips are able to recover most of the money they doled out for these taxes. Overall, taking advantage of this credit is enormously beneficial for restaurant owners, as it can save their business substantial amounts of money each year, while helping to reduce their payroll taxes.

Don't navigate the FICA credit process alone

While owners know the ins and outs of their companies' finances and how much they are paying their employees, trying to figure out the FICA tip credit and how much money restaurants can save through it is something that requires professional assistance. While the documentation - called Form 8846 - to claim the credit seems simple enough, there are many stipulations and other factors of which owners may not be aware when it comes to the FICA tax.

For restaurant owners to take full advantage of the tax benefit and ensure they recover the money to which they are entitled, payroll firms such as Paychex can help with the entire process. The experts at Paychex know the ins and outs of the FICA tip credit, and they can work with owners to fill out all of the necessary paperwork, look over financial records and make sure all information is accurate so that restaurants can get back the money they contributed to payroll taxes based on employees' tips.


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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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