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How will the Minimum Wage Increase in RI Affect Tipped Employees?

December 11, 2017

RI Restaurant owners, are you prepared for the minimum wage increase starting in January? Will this increase affect your tipped employees or your FICA Tip Credit calculation?

Have you read our blog, “Rhode Island Approves 2018 Minimum Wage”? You’ll want to check it out before year-end. The Ocean State has approved a $0.50 increase in minimum wage starting in 2018.

Refresher: What exactly will change in 2018?

The minimum wage for Rhode Island employees is currently $9.60 per hour, but will increase $0.50 starting in 2018. It will eventually rise from $10.10 to $10.50 on January 1, 2019. The Rhode Island Hospitality Association, in conjunction with the RI Business Coalition, advocated for a two year phase-in at $0.50 per year, citing the business community’s need for time to adjust.

The minimum base pay for tipped employees will remain at $3.89 per hour. Although the base pay will not change, the employer does need to ensure that the base pay plus the amount of tips earned by the employee equals or exceeds the new minimum wage amount of $10.10 per hour. If the combined earnings are less than the $10.10 hourly rate, the employer must make up the difference.

Will this change the FICA Tip Credit calculation?

The FICA Tip Credit is a general business credit the Internal Revenue Service allows restaurants. The credit allows restaurants to be "reimbursed" in the form of a tax credit for Social Security and Medicare taxes paid on tip earnings in excess of the federal minimum wage rate. The Small Business Work Opportunity Act of 2007 froze the federal minimum wage rate at $5.15 for this credit's computation purposes only.

How is it calculated?

The calculation is best illustrated by following a fact pattern.

Let’s assume a server worked 1,000 hours and received $5,000 in tips during the year. The server also received $3,890 in wages (excluding tips) at the rate of $3.89 per hour. If the employee had been paid $5.15 an hour (the minimum wage rates used for the purpose of calculating the FICA Tip Credit), the employee would have received wages, excluding tips, of $5,150. The amount of tips needed to arrive at the minimum would be $1,361, the difference between the $5,150 and the $3,789 base pay. The excess tips of $3,639 is then multiplied by the SS & MC tax rate of 7.65% to determine the credit. In this case, the credit and tax savings to the employer would be $278.

Because the calculation for the credit is based on the federal rate of $5.15, the increase in the RI minimum wage has no effect on the federal credit calculation. However, it should be noted that the proposed House Bill, Tax Cuts and Jobs Act (H.R. 1), includes a provision to modify the credit by increasing the rate used to arrive at minimum to the current federal minimum wage. That current rate is $7.25. The proposed change is not part of the recently passed Senate Plan. Until the final bill is signed into legislation, we won't know for sure if the change will survive. If it does, the credit allowed in the example above would be reduced to $125. The reduction in the credit means a $153 increase in tax owed by the restaurant owner in that example for just that one employee. This change is one of the revenue generators that would help pay for the other tax cuts included in the Act. We'll keep a close eye on this area when the final bill is signed into law.

Though the change in the RI minimum wage doesn’t come into play for another month, employers should prepare for this upcoming change by analyzing how the increase will affect their budgets and forecasts.

Questions? Contact a member of our Hospitality Services Team.

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