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The Restaurateur Insights

Revisiting the FICA Tip Credit

June 27, 2013

Now is the perfect time to determine if the FICA Tip Credit can improve your bottom line.

Is your restaurant business losing out on valuable cash flow by not claiming the FICA Tip Credit? With higher income tax rates in place for 2013, now is the perfect time to determine if the FICA Tip Credit can improve your bottom line.

Who qualifies for the FICA Tip Credit?

The FICA Tip Credit is a general business credit the Internal Revenue Service allows restaurants. There are two requirements to qualify for the credit:

  1. The restaurant business has employees who received tips from customers for delivering, or serving food or beverages for consumption;
  2. During the tax year, the restaurant business reported the tip income as taxable employee wages and paid or incurred employer social security and Medicare taxes on the tip.

How is it calculated?

The calculation is best illustrated by following a fact pattern. For example, let’s assume a waiter/waitress worked 1,000 hours and received $5,000 in tips during the year. The waiter/waitress also received $3,750 in wages (excluding tips) at the rate of $3.75 an 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.

For credit purposes, the $5,000 in tips is reduced by $1,400 (the difference between the $5,150 and $3,750) and only $3,600 of the employee’s tips are eligible for the FICA Tip Credit. The actual credit would then be calculated as follows:

Example:

FICA Tip Credit Equation

Please note, by claiming the FICA Tip Credit you will not receive a tax deduction for the payroll taxes. However, in most cases the credit is more tax advantageous since it’s a direct dollar for dollar reduction in tax liability. It is important to inform your payroll provider that you will need the FICA Tip Credit activity tracked - most payroll providers can easily track the necessary information required for annual reporting.

KLR Brings Planning Topic To Client and Saves $120,000 (Example of Successful Utilization of the FICA Tip Credit)

We recently started working with a Boston area restaurateur who was not taking advantage of the FICA Tip Credit. By bringing this planning topic to the client, and opting to claim the credit, we were able to generate a $120,000 overall income tax savings (with a $35,000 direct savings to the principal owner).

Whether it is for owner-operated businesses or established franchises, Boston accounting firms can provide valuable financial services to the industry. KLR’s Hospitality Services Group can help companies manage a variety of vital tasks and responsibilities. By working with this team of dedicated experts, hotels and restaurants can take advantage of essential elements such as hospitality accounting, menu pricing and assistance with the state sales tax process.

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