If you own a restaurant, there is a range of tax credits and deductions that you may have access to. One of these credits is the FICA tip tax credit, which provides certain employers with the ability to obtain a tax credit on some taxes they're required to pay. If you end up paying Medicare or Social Security taxes on the tips that your employees received during the year, the FICA tip tax credit could be available to you in the event that employee tips were higher than the 2007 federal minimum wage that was set at $5.15 per hour.
What Is the FICA Tip Credit?
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The FICA tip credit is designed to provide employers with some relief from taxes they pay on the tips that their employees report on their tax returns. Even though the customer is the one who pays the tip to the employee, it's impossible for employment taxes to be obtained from customers.
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As such, employers are tasked with making these payments every year. By claiming the FICA tip credit, it's possible for businesses to reduce the amount of payroll taxes they owe on their employee's tipped wages.
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Who Does the FICA Tip Credit Apply To?
When an employee earns over $20 in tips per month, they are required by law to report to their employer the amount of tips they receive monthly. Whenever an employee receives a paycheck for their wages, employers will withhold a certain amount of employment and income taxes.
The employee's share of any employment taxes on tip income must also be withheld. When the amount of the withholding is sent to the IRS, the employer is required to match the share of the employment taxes, which can add up to a considerable sum of money depending on the amount of tips that employees earned during the year.
How to Calculate FICA Tip Credit
If you're wondering how to figure out FICA credit, the calculation is relatively straightforward. To better understand how to calculate the FICA tip credit, an actual FICA calculation example is necessary: Let's say that XYZ LLC owns a restaurant and employs Individual A. During the month of June, Individual A worked for 120 hours and was paid $500 in wages with $900 in total tips.
To begin this calculation, you will first need to identify the minimum wage amount, which involves a calculation of 120 hours x $5.15. Even though the federal minimum wage is now higher, the $5.15 figure represents the minimum wage at the time when the FICA tip credit was enacted in 2007. This calculation leads to a federal minimum wage of $618.
You must then subtract the wages that were paid from the federal minimum wage amount of $618, which means that the calculation looks like $618 less $500 in wages paid. The $118 difference is completely ineligible from this tax credit. To identify the amount of tips that apply to this credit, subtract the ineligible amount from the total tips ($900 less $118.) This calculation results in creditable tips of $782.
The final step to calculate the FICA tip tax credit is to multiply the amount of creditable tips by the Medicare and FICA tax rate, which is 7.65 percent. This calculation looks like: $782 x 7.65 percent. Based on this calculation, you would receive a total FICA tip credit of $59.82.
Credits are a great way to reduce your tax burden and save some of your money. Getting these calculations right is essential when filling out your annual tax forms. If you happen to make a mistake, your refund could be delayed until the necessary corrections are made. This guide should help you calculate the FICA tip tax credit that you're owed for the year.
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