Despite the fears you once had of entering the restaurant industry, your Mom-and-Pop sandwich shop is flourishing. You have great food, loyal customers, and a happy staff that keeps your business up and running smoothly.

As a restaurant owner, it’s important to stay well-versed in the laws that affect your business, especially those that can actually save you money. Here’s what you need to know about the FICA Tip Tax Credit and what it could mean for your business (check out our FICA Tax Tip Credit Calculator by clicking here):

What is it?

The Federal Insurance Contributions Act (FICA) says that the tips your restaurant employees receive from customers count as taxable income for which you can earn credit.

Whether these tips come in the form of cash or from a card, you are required by law to report them and pay taxes on them.

A credit is a “dollar for dollar reduction of your regular tax liability, where an expense deduction only reduces your taxable income.” The FICA Tip Credit is the employer’s share of the employment taxes on the tips given to his/her employees.

Am I eligible?

The IRS lists two criteria that must be met in order to be eligible for the FICA Tip Tax Credit:

  1. Your employees received tips from customers for providing, delivering, or serving food or beverages for consumption.
  2. You paid or incurred employer Social Security and Medicare taxes on these tips.

It’s important to note that payment is only considered a true “tip” if it is additional pay to the minimum wage rate of your state. In other words, if you are paying your employees $4.75/hr and your state’s minimum wage rate is $7.25/hr, the money that can be reported for the FICA Tip Credit are only the tips that put them over a $7.25/hr rate.

What employers need to do:

As an employer you must withhold 4.2% of the tips for Social Security taxes and 1.45% for Medicare taxes. Additionally, you must pay your share of the employment taxes, 7.65% (6.2% for Social Security and 1.45% for Medicare.)

It’s also important to know the difference between a credit and an expense deduction, because you cannot claim both. Credits are typically more beneficial, but you should also sit down with your accountant and decide which one is best for your business.

The FICA Tax Credit is part of the general business tax credit. It can be claimed on Form 8846 under “Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips.”

The best way to keep your restaurant business booming is to stay up to date on industry-specific regulations such as these. Talk to your accountant to find out if the FICA Tax Tip Credit can be implemented at your business today.

Click here to use our FICA Tax Tip Credit Calculator!

IRS Circular 230 Disclosure: We inform you that any U.S. federal tax advice contained in this communication (including any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed therein.

Our guidance is designed only to give general information on the issues actually covered. It is not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion.  Consult your own legal advisor regarding specific application of the information to your own plan.