Navigating “Tip Credits” and Unlocking Significant Tax Savings
Is your company maximizing its savings?
The concept of “tip credits” can be confusing. On the one hand, federal and state labor laws allow employers to use “tip credits” to meet minimum wage requirements. On the other hand, the federal government provides an income tax credit equal to the payroll taxes paid by the employer on certain tips. If you have employees on staff who receive tips for food or beverage service - whether you’re a restaurant or have ancillary food or beverage service operations - the IRC § 45B Federal Insurance Contributions Act Tip Credit (“FICA Tip Credit”) is an income tax credit for businesses based on the FICA tax paid by the employer on a portion of tips that are received by tipped employees. This credit can generate significant savings for an employer in the food and beverage industry. If you missed this opportunity in prior years, you may be able to claim a refund, but the deadline to claim refunds may be fast approaching. Is your company capitalizing on this opportunity?
Maximize Your Savings
The FICA Tip Credit was enacted in 1993 to encourage taxpayers who employ individuals receiving tips for food and beverage service to report the tips received by these employees. IRC § 45B provides that the tax credit equals the payroll taxes paid on tips in excess of the federal minimum wage, which is assumed to be $5.15 for purposes of calculating the credit (rather than the current federal minimum wage of $7.25). As such, the FICA Tip Credit has become a valuable opportunity for restaurants and other taxpayers with a food or beverage component attached to their services. However, as federal and state minimum wage laws have changed over the years, there is considerable confusion about which tips qualify for the FICA Tip Credit.
FICA Tip Credit basics:
Income tax credit available to employers in the food and beverage industry
The tax credit is essentially 7.65% of the tips earned by employees to the extent the employee’s total earnings exceed $5.15/hour
Employers may amend returns to claim the credit for any open tax year (i.e., 3-year lookback).
Employers that claim the credit must reduce their payroll tax deduction by the amount of the credit
Example: Restaurant pays Employee $2.13/hour. In 2024, Employee worked 1,440 hours and received $12,000 in tips. Since a portion of Employee's tips must be used to meet the minimum wage requirement, the tips upon which the credit is calculated for Employee must be reduced by $4,348.80 (($5.15 - $2.13) x 1,440). Thus, the credit calculation is ($12,000.00 – $4,348.80) x 7.65%, or $585.32. If Restaurant has 100 employees making the same wage and the same amount in tips, the credit would be $58,532.00.
ZHF Consulting LLC is working with Resolute Tax Credits to assist our clients with respect to the FICA Tip Credit. If you would like to further discuss FICA Tip Credit and how it affects you as an employer, please reach out to Rita Williams of ZHF Consulting LLC or to Tim Parrish (tim.parrish@resolutetaxcredits.com) or Matt Kelley (matt.kelley@resolutetaxcredits.com) of Resolute Tax Credits.
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