FICA Tip Credit Important for Restaurants

Tax season is upon us and we found this tidbit of information in our Missouri Restaurant Association weekly newsletter. Thought it might be useful so we figured we would share. Of course it’s best to consult with your accountant and/or a tax professional before moving forward with any new filings, but this one seems like it can pay off under the right circumstances.

As the filing season begins for tax returns of 2014 income, MRA reminds restaurants to take advantage of the FICA Tip Credit.  Available only to owners of food and beverage establishments, it can save a restaurant owner thousands of dollars per year.  The credit, which is a dollar-for-dollar reduction in federal income tax expense,  is requested on Form 8846 (Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips) which is filed with the restaurant’s federal income tax return.

Authorized by Internal Revenue Code Section 45B, the FICA Tip Credit equals the amount of the employer’s portion of social security taxes (currently 7.65%) on tip income not used to bring the employee’s wages up to the minimum wage.  For purposes of calculating this credit, the minimum wage is capped at $5.15 per hour – the rate in effect at January 1, 2007.

A simplified example can serve to illustrate the credit calculation.  Sally, a server for a restaurant, works 40 hours in a certain week and earns $12.00 per hour in tips.  Her employer pays her a cash wage of $3.825 per hour (50% of the state’s minimum wage) as required by Missouri law.  Sally’s total tip income for the week is $480.00 (40 hours X $12 per hour).  Tips required to bring her wages up to the minimum is $53.00 (($5.15 – $3.825) X 40 hours).  Tip income in excess of the amount required to bring her wages up to the minimum wage is $427.00 ($480.00 – $53.00).  The FICA Tip Credit available to her employer for this week is $32.67 ($427.00 X  7.65%). Assuming Sally works 50 weeks during the year, the annual FICA Tip Credit would equal $1,633.50.

Now, multiply this credit of $1,633.50 by the number of servers in the restaurant and one can readily see the importance of the FICA Tip Credit.  All of the details related to the credit are beyond the scope of what can be included in an article of this length.  MRA encourages its members to seek the guidance of a competent income tax advisor.

Hopefully this was helpful and feel free to share with others.

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