How-to Qualify for the FICA Tip Credit
If you own a bar, restaurant, or brewery, you should be taking advantage of the FICA Tip Credit every year.
That’s step one. And if you aren’t, we advise getting another accountant!
We’ve previously written an entire article about the FICA Tip Credit, where we talk about how NOT claiming the credit has cost some of our clients upwards of $100,000 in free money from the government! You can read more on that here.
But for the sake of today’s article, we’re only going to discuss how to qualify for the lucrative tax credit, and your next steps for doing so.
Let’s dive in.
How do you qualify for the FICA Tip Credit?
The FICA Tip Credit is essentially free money from the government that you can claim back based on the amount of tips that your employees report.
Normally, as an employer, you’re responsible for paying a portion of Social Security and Medicare taxes for your employees. However, because your tipped employees are receiving tips from customers, the FICA Tip Credit allows you to count a portion of those tips as if they were wages paid by the restaurant.
The end result? Less taxes paid by you!
So, how do you qualify for it?
The good news is that as long as your employees regularly receive tips as part of their jobs and you follow a few reporting rules, you will almost certainly qualify for the free money.
But to qualify for the FICA Tip Credit, both you and your employees need to meet certain requirements.
Here are the key qualifications:
For Employees (Tipped Workers):
- Receive Tips: Employees must regularly receive tips as part of their job. This typically includes professions like servers, bartenders, and other tipped positions.
- Report Tips: Employees need to accurately report their tips to their employer. This should be done regularly, usually by filling out a form like Form 4070A (Employee’s Daily Record of Tips) or through an electronic system set up by the employer.
- Minimum Wage Threshold: The total of tips and wages paid to the employee must add up to at least the federal minimum wage. If the employee’s direct wages plus the tip credit do not equal the minimum wage, the employer is required to make up the difference.
For You (Restaurant/Bar Owners):
- Tipped Employees: You must have employees who regularly receive tips as part of their compensation.
- Records: You must keep accurate records of the tips received by their employees. This is important! This includes both the tips reported by employees and any additional tips that might be allocated to them under the Tip Rate Determination Agreement (TRDA) method.
- Tax Reporting: You need to properly report tips on your employees payroll. This is where your accountant can help. *Note, auto gratuities and service charges should not be reported as tips to the employees, but should be reported as normal taxable compensation.
- Tax Payments: You must pay the employer share of Social Security and Medicare taxes based on the total wages (including both direct wages and estimated tips) paid to the employees. Again, your accountant can do this part for you.
It’s that easy!
The bottom line is that 99% of all restaurant and bar owners qualify for the FICA Tip Credit. There are really no excuses for why you shouldn’t be claiming the tax credit every year in your business.
What are the next steps to claim the FICA Tip Credit?
To physically take advantage of the FICA Tip Credit in 2023, you’ll need to fill out Form 8846: The Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips during your year-end tax filing. (You can also amend up to 3 years of previously filed tax returns).
But the best thing to do? Get in touch with a good accountant.
An experienced accountant can help your restaurant, bar or brewery save thousands of dollars in payroll taxes, and will more than offset the increased fees of using a better accountant.
It’s well worth the chat to find out how much they can save for yours.
Until next time!