FICA Tip Credit And Its Effect on Restaurant Businesses

FICA Tip Credit and its Effect On Restaurant Businesses

Due to the nature of the business, restaurant businesses have many tax complications, and FICA Tip Credit is an important one. It is crucial that businesses are aware of this and stay compliant to keep the employer and the employees safe. 

PeopleWorX has been working with many restaurant businesses to make sure they stay compliant. 

Check out our restaurant payroll and HR information page to stay informed of other regulations related to the restaurant industry. 

Whether outsourcing your payroll and tax services or doing it yourself, it is important to be fully aware of FICA Tip Credit. 

What is FICA Tip Credit And The Eligibility Criteria?

Mandatory Most of you know that FICA Tip Credit is associated with the Food and Beverage Industry. 

FICA Tip Credit is a tax credit that allows businesses to take tax credit for a portion of Social Security paid on tips that are paid to employees. 

To be eligible for FICA Tip Credit, you must be in the food and beverage industry with tipped employees who service food or drink. 


Who Qualifies For The FICA Tip Tax Credit

Businesses that follow the federal Minimum Wage (including tips) for your non-exempt employees. 

Businesses in the food and Beverage industry. 

Businesses that have tipped employees, especially those who serve food and drinks. 
FICA Tip Credit

What are considered Tips?

PA tip is a voluntary payment from the patron or customer for the service provided in addition to the service cost. 

Tips can be paid in the form of cash, check, or charged on the customer’s credit card on the business account and it will be paid later to the employees. The recent addition is electronic transfers like Zelle, Venmo, Paypal, etc.,

If a customer gives a non-cash tip, the value of that non-cash tip may not be reportable to your employer, but it is taxable on your income tax return. 

How to report tips?

Who: When it comes to reporting tips, it is usually reported by the employees who receive tips. 

When: Generally, the employees who receives tips are expected to inform the employer every pay period. If reporting on a monthly basis, it is required that the employees report the tips before the 10th of the following month.  

How: Employees could use IRS form 4070 to report tips or provide the necessary details, such as the tip amount, employer’s name and address, employee name and address, SSN, tipped month, date of the report, and employee signature, which should be in writing. 

Forms that need to be filled for FICA Tip Credit? 

Here are the essential forms to claim the FICA Tip Credit:
1. Form 941
2. Form 8846
3. Form 1120
4. Form 1120s

How to calculate the FICA Tip Credit?

For If you are in the hospitality industry, knowing how to calculate the FICA Tip Credit correctly is vital to obtaining tax advantages. You should carefully calculate the tip amount, employee wages, and the FICA Tip Tax rates. 

Follow these four steps to calculate your FICA Tip Credit: 

          1. Identify the total amount of tips reported on payroll. 

          2. Determine the amount of tips used to meet the minimum wage. 

          3. Calculate the amount of tips that exceed the minimum wage. 

          4. Apply FICA tax rates to the amount of tips that are eligible for the FICA Tax Credit.


Things to consider when accounting for FICA Tip Credit?

To sum up, everything is important when it comes to tax documents. 

1. A business should track all the tips, whether big or small. 
2. You should make sure no tip goes untaxed. 
3. Filling out the right form at the right time is very important. 

For more information on FICA Tip Credit, always refer to the U.S. Department of Labor or the state website.