How to Calculate the FICA Tip Credit in 2024
As a restaurant, bar, or brewery owner in 2024, there is one tax credit that should be front and center in your tax strategy: The FICA Tip Credit.
Unfortunately, the amount of new clients we see at U-Nique Accounting who are not currently claiming it or miscalculating the savings is staggering.
So, in today’s post, we’re going to cover how to calculate the FICA Tip Credit in 2024 for your restaurant or bar and give you a quick calculator to use to make it easy for you.
Pssst.. you can skip ahead to the calculator now if you want.
Let’s dive in.
What Is The FICA Tip Credit?
First things first, let’s go back over what the FICA Tip Credit is.
Essentially, it’s a way for the government to cut restaurants & bars a break on the tax that’s owed on tips.
Before the credit was enacted, the IRS estimated that about 15% of tip income was reported. By eliminating the tax that typically comes with income (i.e. tips), the FICA Tip Credit was designed to theoretically deter businesses from hiding or underreporting tip income.
Without the FICA Tip Credit, your restaurant, bar, or brewery may end up paying a huge sum of payroll tax, due to the generous tipping of patrons.
It’s a HUGE tax break and it’s important to claim the credit every year – even if you don’t think it will make a difference.
Any unused credit can be carried forward up to 20 years until it’s completely utilized.
How To Calculate Your FICA Tip Credit Savings in 2024
Confused? It’s okay, bear with us as we walk through an example.
Let’s say you’re operating in a state that allows tip credits, and the federal minimum wage is $7.25 per hour. Your tipped employees are paid a cash wage of $2.13 per hour, which is the federal minimum cash wage for tipped employees.
First, you calculate the tip credit for each employee:
Minimum wage – Cash wage = Tip credit
$7.25 – $2.13 = $5.12
So, the tip credit per hour worked is $5.12.
Let’s say one of your tipped employees worked 8 hours during a pay period and earned $100 in tips. You calculate their tip credit for the pay period:
Tip credit per hour x Hours worked = Total tip credit
$5.12 x 8 = $41.60
So, the tip credit for this employee for the pay period is $41.60.
Next, you ensure that the employee’s total earnings for the pay period meet or exceed the minimum wage. The minimum wage for 8 hours of work is:
Hours worked x Hourly minimum wage = Minimum wage
8 hours x $7.25 = $58.00
Now, let’s calculate the employee’s total earnings for the pay period:
Total cash wage + Tips = Total earnings
($2.13 x 8) + $100 = $17.04 + $100 = $117.04
Since $117.04 exceeds the minimum wage of $58.00, you can claim the full tip credit of $41.60 for this pay period.
Remember to run payroll with the correct information entered to ensure accurate calculations and compliance with tax laws.
Cheatsheet: Use Our FICA Tip Credit Calculator!
Still confused? We get it!
That’s why we created a simple FICA Tip Credit Calculator for you to use to calculate your savings for each employee.
Simply add in a few easy numbers (i.e. # of hours worked, average tips made) and we’ll spit out the numbers for you.
Give it a try here!
Need More Help With Your FICA Tip Credit Calculations?
As experienced restaurant and brewery accountants, we know how valuable the FICA Tip credit is for your business.
We also know how complex it is, and how many accountants get it wrong.
If you’d like for us to look over your books and see if you’re missing out on this lucrative tax break each year (it could be tens of thousands of dollars!), you can book an introductory call with our team at any time.
Simply use the calendar below to book your first call.
In the meantime, you might want to check out our complete guide on the FICA Tip Credit for restaurants. We think you’ll find it useful.
Until next time!
