If you are a food and beverage employer with tipped employees, you may be eligible to claim the Federal Insurance Contributions Act (FICA) Tip Credit. The credit lets you reduce your taxable business income by the amount you pay for the employer share of the Social Security and Medicare taxes (FICA tax) on certain employee tips. The employer share of the FICA tax is currently 7.65%. The FICA Tip Credit is a non-refundable, general business tax credit. Unused credits can be carried back for one year or carried forward for up to 20 years. Who’s eligible If you’re an employer with a food or beverage business where tipping is customary, you’re eligible for the FICA Tip Credit if: Your employees receive tips from customers for providing, delivering, or serving food or beverages You paid or incurred employer social security and Medicare taxes on those tips during the tax year The credit is available whether or not the employee reports those tips on their own tax return. How to figure the credit The FICA Tip Credit equals the amount of employer Social Security and Medicare (FICA) taxes you paid or incurred on certain tips your employee received. You can’t claim the credit for taxes on any tips used to meet a minimum wage of $5.15 an hour, the federal minimum wage rate in effect on January 1, 2007. This wage is the basis for calculating the credit. To figure the FICA Tip Credit: 1. Identify the tips on which you paid FICA tax These are the tips the employee reported on which you paid employer Social Security and Medicare taxes during the tax year. Distributed service charges or auto-gratuities are characterized as non-tip wages and are excluded from the tip credit. Service charges are amounts determined by the employer and not voluntarily made by the customer. For example, the employer requires 18% gratuity added to bills for parties of over 6 people. See Revenue Ruling 2012-18 for more information. 2. Calculate any tips that aren’t creditable If the employee’s wages (excluding tips) are less than $5.15 an hour, a portion of the tips aren’t creditable. This portion equals the amount that would be payable to the employee at $5.15 an hour minus the actual wages (excluding tips) paid to the employee. 3. Determine creditable tips Subtract any tips that aren’t creditable from the total tips. 4. Figure the credit amount Multiply the creditable tips by the FICA tax rate (7.65%). Example Last month, a restaurant employee worked 100 hours at $3.75 per hour. They received $375 in wages and reported $450 in tips. The minimum wage basis for the FICA Tip Credit is $5.15 per hour. To figure the FICA Tip Credit: Identify the tips on which you paid FICA tax $450 reported by the employee Calculate tips that aren’t creditable $140 = $515 minimum wage basis - $375 wages paid Determine creditable tips $310 = $450 tips - $140 tips not creditable Figure the credit amount $23.72 = $310 creditable tips x 7.65% FICA tax rate How to claim Complete Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, and, in most cases, attach this form to your tax return to claim the credit. You'll need to include information about the tips your employees received and the Social Security and Medicare taxes you paid on those tips. Claiming for prior years To claim the FICA Tip Credit for prior years, file an amended tax return for those years and, if applicable, attach Form 8846 to the amended return. Related Tip recordkeeping and reporting Credits and deductions for businesses Tips on Tips: Employer Guide to Tip Income Reporting Where Tip Income is Customary, Publication 3144 PDF
