The FICA Tip credit (FICA stands for Federal Insurance Contributions Act) is a federal income tax credit that was enacted to offer financial relief to businesses in the food service industry that has employees who receive part of their wages through tips given by customers. The tax credit was originally designed to deter businesses from hiding or underreporting tip income and prevent an unintended financial burden on those businesses for their share of the FICA tax on reported tips.
If you own a restaurant or bar and have employees who receive tips, you are likely eligible to receive the FICA tip credit. Not to mention it’s well-known that bartenders, waiters, and waitresses make minimum wage, and in some cases, less than that. For reference, the current minimum wage for tipped employees is $2.13. In addition, with the current economic uncertainty, now is a great time to take advantage of this credit as tax season is quickly approaching.
Here are five things to know about the FICA tip credit:
1. Social Security and Medicare Play a Role
With every paycheck an employee receives, the government deducts a certain amount of that money from both the business and the employee, which is put towards the federal funding of Social Security and Medicare. Broken down further, an employee’s share of the Social Security portion of the FICA tax is 6.2 percent of gross compensation (up to a limit) and 1.45 percent for Medicare tax. The employer is also burdened with a liability in the same amount (i.e., 50 percent is paid by the employee, and 50 percent is paid by the employer). The FICA tip credit effectively removes the economic burden associated with the employer's portion.
2. A Few Key Industries Are Eligible
The FICA tip credit is available only for businesses that are in the food and beverage industries which can also include hospitality if the company operates restaurants as part of their business.
Four requirements determine eligibility:
- Your business employed workers in connection with providing, delivering, or serving food or beverages;
- Your employees receive tips from customers for providing, delivering, or serving food and beverages for consumption, where tipping is customary;
- Your business paid or incurred employer social security and medicare taxes on those tips.
- Your employee's total wages exceed $5.15 per hour after including tipped income in the analysis ($5.15 was the federal minimum wage in effect on January 1, 2007).
3. It’s Easy to Find Out if You Are Already Taking Advantage of the Tax Credit
A quick way to determine if your business is receiving the FICA is to check your tax return – if you see IRS form 8846 Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, then you are already receiving the FICA.
4. The Credit Can Reduce Your Overall Income Tax Burden to Zero, and Excess Can Be Carried Forward
The credit is one of the General Business Credits outlined in Section 38 of the Internal Revenue Code, and as such, any excess credit can be carried back one year and forward for 20 years if the credit exceeds your income tax liability.
5. If You Haven’t Been Claiming the Credit, You Can Usually Go Back Three Years
If your business is eligible for the credit, but you haven’t been claiming it, you can usually recover three years of benefit by filing amended returns.
We recently worked with a bar that employed 20 part-time workers and had $1.2M in gross receipts. Their FICA tip credit was just over $9k per year, and they were able to go back and claim 3 years' worth of benefits. Because their bar was profitable, they had an income tax obligation for all three years and were eligible to receive a $27K refund.
How to Determine FICA Eligibility
For more information or to help your business determine eligibility, we recommend contacting tax credit experts. After all, not doing so could mean your business is missing out on tens of thousands of dollars, so it is well worth looking into.