A special income tax credit exists for “food and restaurant establishments”, which is commonly referred to as a “tip tax credit.” IRC Section 45B stipulates that FICA/Medicare taxes paid by restaurants/bars on a portion of a tipped employee’s compensation (wages and tips) is allowed as a federal tax credit on the employer’s business income tax return.
Restaurants/bars with tipped employees should make sure they are accurately claiming this Section 45B income tax credit on their annual business/personal income tax returns.
PURPOSE OF THE TIP TAX CREDIT
The IRS believes that employers will promote accurate employee tip income reporting IF the employer has a financial incentive in implementing an accurate tip reporting system. The IRS believes that tax revenue obtained through accurate reporting of tip income will exceed the amount of tip tax credits paid to the employers.
CALCULATING THE TIP TAX CREDIT
A restaurant/bar (technically a “food and beverage establishment”) is required to both withhold and “match” FICA and Medicare taxes on an employee’s wages and tips. The employer’s “match” of FICA & Medicare taxes on combined wages & tips in excess of $5.15 per hour worked/paid, is “refundable” to the employer in the form of a tax credit against their federal income tax liability.
EXAMPLE
A restaurant server works 2,080 hours in 2013 (hours worked includes all paid time including holidays, vacations, etc) and is paid $2.13 per hour or $4,430 for the year. The server reports tip income of $13,000 to the employer. The employer withholds and “matches” FICA & Medicare taxes on the server’s combined wages and tips. The restaurant’s Section 45B “tip tax credit” for 2013 is calculated as follows for this server:
Hours worked by server: 2,080
Section 45B “minimum wage” amount: x $5.15
Server’s compensation based on $5.15 per hour: $10,712
Server’s 2013 combined wages ($4,430) & reported tips ($13,000) = $17,430
Less server’s compensation based on $5.15 per hour: ($10,712)
Tip income above $5.15 per hour: $6,718
FICA & Medicare tax rate: x 7.65%
2013 Tip Tax Credit/Employer tax savings: $514
HOW TO CLAIM THE TIP TAX CREDIT
IRS Form 8846 is completed and attached to the employer’s annual income tax return in order to calculate and claim the Section 45B income tax credit. All of the information needed to complete Form 8846 is contained in the employer’s payroll system records.
ACCUPAY CAN HELP RESTAURANTS OBTAIN THE MAXIMUM TIP TAX CREDIT
AccuPay maintains records of wages, reported tips and hours worked for all tipped employees of our restaurant clients. This information is already needed for accurate reporting of payroll and payroll taxes.
AccuPay has custom-designed a report, “Section 45B Tip Tax Credit,” which we can create annually for our restaurant clients. This report is available on the “Forms and Downloads” page of our website at www.accupay.com.
AccuPay can also complete a client’s annual IRS Form 8846 if requested by our client. This completed IRS Form 8846 can be provided to your CPA/tax preparer so that your maximum “tip tax credit” can be claimed in your annual income tax returns.
IN CONCLUSION
Contact your payroll processor at 317-885-7600 if you have any questions about the tip tax credit. You can also email your tax credit questions to AccuPay’s Tax Director, Larry Shaub, CPA, CPP, at larry@accupay.com.
PayDay is an email communication of payroll news, legal updates and tax considerations intended to inform clients and colleagues of AccuPay about current payroll issues and planning techniques. You should consult with your CPA or tax advisor before implementing any ideas, comments or planning techniques.