What is the FICA Tip Credit and How Can Employers Take Advantage of It?

Employees who work in the restaurant industry and earn gratuities from customers are required to report monthly tips in excess of $20 to their employers. Employers are then required to withhold both the employee’s and the employer’s share of employment taxes on the tip income reported.

The FICA Tip Credit was enacted to provide tax relief to a business paying employment taxes on tip income and can potentially save employers hundreds of dollars per employee.

To calculate the credit, employers must first calculate an amount known as “creditable tips.” Tipped employees are typically paid an hourly rate below the federal minimum wage rate. The creditable tips calculation removes the tip income that makes up the difference between the employee’s hourly wage and the federal minimum wage. The steps in calculating the credit available are:

  • Multiply the number of hours the employee worked times the federal minimum wage rate (federal minimum wage amount)
  • Subtract from that number the actual wages paid to the employee (tips not eligible for the credit)
  • Subtract the amount of tips not eligible for the credit from the total tips reported by the employee (creditable tip amount)
  • Multiply the creditable tip amount by the combined FICA and Medicare tax rate (currently 7.65%) to determine the credit available

Example: Restaurant LLC operates a restaurant and employs Jane. Jane worked 150 hours and received $600 in wages and $900 in tips last month. The federal minimum wage is $7.25 and the FICA and Medicare tax rate is 7.65%. The FICA Tip is calculated based on the following:

  • Federal minimum wage amount: $1,087 (150 hours x $7.25 minimum wage)
  • Tips not eligible for the credit: $487 ($1,087 wage minimum - $600 wages paid)
  • Creditable tip amount: $413 ($900 tips - $487 tips not eligible)
  • FICA tip credit: $32 ($413 creditable tips x 7.65% tax rate)

It is important to note that in order to qualify as a “tip,” the customer cannot be required to pay it and must have the right to determine the amount. If the employer dictates the receipt or amount, such as a service charge applied to a bill and shared among multiple employees, the amount will generally not qualify for the credit.

It is also important to note that if the state minimum wage rate is higher than the federal minimum wage rate, the higher rate applies.

The information needed to calculate the credit should be readily available from the business’s payroll provider.

The credit can be claimed by filing Form 8846 (Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips) with the business’s annual income tax return.

For further information on this credit program, please contact Schneider Downs.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2022 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on
Post-Pandemic Fraud Landscape
Electric Vehicle Charger Tax Credit Extended and Expanded by the Inflation Reduction Act
Everything You Need to Know about the New Electric Vehicle Tax Credit
Ohio Enacts Pass-Through Entity Tax
What You Should Know About PA’s Latest Tax Law Changes
UPDATE: Inflation Reduction Act – Final Senate Version Eliminates the Change in Carried Interest Rules
Register to receive our weekly newsletter with our most recent columns and insights.
Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us
contact us

This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.

×