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Restaurant Owners: Understanding the FICA Tip Credit and Calculator

Many restaurant owners are not aware of the FICA tip credit. By accurately reporting on the tips that workers receive, businesses have access to a potentially valuable tax credit. Here's a closer look at what owners need to know and how the Paychex FICA tip credit calculator can help.
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As tax time approaches, restaurant owners and managers must add finalizing their previous year’s accounts and navigating restaurant payroll and taxes to an already demanding job. Handling employee taxes in the restaurant industry is particularly complex due to the fact that restaurant employees often receive multiple types of compensation. Employee paychecks can include standard hourly wages, meal value, tips, service charges, special event compensation, and more. Each type of compensation may require a different tax treatment. As a result of keeping track of so many details, many restaurant owners are not taking advantage of an important tax credit potentially available to them.

See how much money your restaurant could be saving on taxes with our FICA Tip Savings Calculator.

Tips and the Federal Insurance Contribution Act (FICA)

One particularly important area for restaurant managers to understand is their responsibility in connection with FICA. As employers, restaurant owners must pay taxes on the gratuities that servers and other employees receive from customers. Tips are defined as income with respect to FICA. The IRS has enacted an income tax credit known as the FICA tip credit. The goal of the FICA tip credit is to ensure that restaurants are reporting staff tip earnings. If a restaurant owner chooses to participate, the credit may help the employer save hundreds of dollars each year per employee.

Qualifying for the FICA Tip Tax Credit

To be eligible for the credit, restaurants must determine that all non-exempt employees are compensated at least the federal minimum wage for hours worked. If the state that the restaurant resides in has a higher minimum wage rate, the higher wage applies. Compensation may be totaled from different types of compensation received, such as hourly wages, tips and gratuities that the staff member records, and meals that are provided by the restaurant to the employee.

Employees must keep an accurate record of daily tips (whether paid by cash or credit). A total must be provided on an annual basis to the employer. This reported total is then used as the basis of income tax recording, social security payments, and other withholdings. Restaurants must follow up with employees as required to ensure this information is received.

How to Claim and Calculate the FICA Tip Tax Credit

The FICA tip credit can be requested when business tax returns are filed. It is reported on IRS Form 8846, which is sometimes called Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips.

Determining if the FICA tax tip applies to your business can be a challenge. Restaurant employers measure tips toward meeting minimum wage standards. When tips exceed the federal minimums, employers can qualify for tax credits. The formula is equal to the restaurant owner’s portion of the FICA tax, presently 7.65 percent, multiplied by tips above the federal minimum wage.

To better understand how much you can save through this tax credit program, use our FICA Tip Tax Savings Calculator. Restaurant owners can input their business information and quickly and easily calculate their savings.

To learn more ways to make it easier to pay employees and address laws regarding wages and tips, download our white paper, Taking the Pain Out of Restaurant Payroll.

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