What Does FICA Tip Credit Eligibility Mean for Restaurant Owners?

4 min read
May 19 2021

Many restaurant owners dread the tax-paying period for two reasons.

  1. One is the sizable amount they have to part with.
  2. The other is the complexity of the reporting process. 

By taking advantage of the right tools and learning about tax credits, it's possible to file taxes easily while saving money and staying compliant.

The FICA tip credit is designed specifically to ease the tax burden on restaurant owners. With the right approach to reporting, you can receive a credit on part of the FICA taxes paid on employee tips.

Let's take a closer look at FICA tip credit eligibility and how it can work for your restaurant. 

What is the FICA Tip Credit?

The FICA Tip Credit program allows business owners in the food & beverage industry to take a credit against their federal income taxes based on the size of FICA and Medicare taxes paid on reported tips.

As an employer, a restaurant owner has to pay taxes on the tips received by the employees. According to FICA, tips are described as income. To encourage restaurants to report their tip-related income properly, the IRS introduced FICA Tip Credit. The program can save a restaurant thousands of dollars annually.

Here are the nuances of FICA tip credit:

  • The tax credit is only calculated on tips that are in excess of the tip amount that brings the employee's earnings above the minimum wage (for cases when fixed salaries are lower than the minimum wage).
  • The FICA tip credit program only works if you have employees who receive tips for providing, delivering, or serving food or beverage for consumption. Tips received for anything other than food and beverages aren't eligible for the credit.
  • You can get the credit only if you paid or incurred employer social security and Medicare taxes on the tips.
  • FICA tip credit can only be used for income tax liabilities but not for employer payroll tax liabilities.
  • If you don't use the FICA tip credit for the current year, it can be carried back one year or forward 20 years.

To be eligible for the FICA tip credit, you only need to meet two requirements:

  • Have employees who receive tips from customers for providing, delivering, or serving food or beverage for consumption.
  • Pay or incur employer Social Security and Medicare taxes on these tips.

The IRS calculates the credit based on the restaurant's corporate tax return. It's reported on IRS Form 8846 (Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips).

Formula: FICA Tip Credit amount = Employer's portion of the FICA tax (currently 7.65%) x Tips in excess of the federal minimum wage.

How to Take Advantage of FICA Tip Credit Eligibility

If you are eligible for FICA tip credit, you need to take a serious approach to tip reporting. Whatever system you have in place right now may need to be revamped to capitalize on FICA tip credit eligibility.

Here are a few things you need to do:

  • Monitor the minimum wage — since your tax credit is based on tips you report in excess of the amount that brings employee earnings above the minimum wage, staying on top of the latest wage changes is a priority. The minimum wage varies from state to state and increases annually.
  • Structure employee reporting — make the employee tip reporting system as simple and straightforward as possible. Each worker should know exactly what needs to be reported and when it must be done. Enable your employees to simplify the reporting process.
  • Communicate penalties — employees must understand that failing to report tips accurately can be penalized. The IRS can impose a penalty equal to 50% of the Social Security and Medicare tax an employee fails to pay. Meanwhile, it keeps the employer from receiving the due tax credit.

The IRS provides a special form (4070A Employee's Daily Record of Tips) to simplify and standardize tip reporting for restaurant employees. The form is straightforward and easy to use. However, designed back in 2005, it implies using pen and paper to report tips.

In the 21st century, restaurant owners have numerous tools in their arsenal to help employees report tips online and in real-time. To make sure you get maximum tip credit, tip reporting must be seamless.   

Simplify Tip Reporting

Once you collect the information from employees, you need to report it to the IRS in the right manner. Many businesses struggle to provide error-free reports since they lose information along the way or make mistakes transferring data from one program to another.

By implementing a high-quality payroll and HCM system, it's possible to improve and automate tip reporting. This can help you take advantage of the FICA tip credit without making an extra effort.

Payroll Network’s Restaurant People Cloud is designed specifically to improve your restaurant's operational efficiency, including streamlining tip reporting. It will help you take advantage of your FICA Tip Credit eligibility, ensure tip-related data accuracy, keep you compliant with IRS requirements, and synchronize payroll information for tip reporting. With the right software, tip reporting for FICA tip credit isn't complicated. 

Capitalize on FICA Tip Credit Eligibility

As a restaurant owner, you are likely to be eligible for FICA tip credit. Taking advantage of it is easy as long as you have a straightforward tip reporting structure.

By implementing the right software, you can minimize manual data entering, thus avoiding errors and speeding up the reporting process. Meanwhile, you can make sure you are compliant with IRS reporting requirements.

PNI•HCM offers a variety of useful tools to help with tip collecting and reporting. By taking advantage of our systems, you can capitalize on your FICA tip credit eligibility while streamlining your payroll and HR systems.

To learn more about our tools, don't hesitate to get in touch with our team.

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