If you run a restaurant that handles tips, you know that it can sometimes be tricky to keep track of everything. You’ve got to deal with cash tips, charged tips, tip credit, minimum wage laws, tip reporting, and more.
But the good news is, once you understand some of the key terms related to tips, you can better prepare to handle them at your business and keep you and your employees compliant.
How do FICA taxes work with tipped employees?
FICA taxes are paid by both employees and employers on gross wages. Gross wages include tips, so FICA taxes are owed on tips. It is important that tips get reported correctly and input into payroll so that FICA (and all other payroll taxes) are withheld correctly.
FICA includes two taxes: Social Security and Medicare. Both employers and employees pay FICA taxes on wages. The total rate for Social Security is 12.4%, meaning employers and employees pay 6.2% each. The total rate for Medicare is 2.9%, meaning employers and employees pay 1.45% each.
Some employees make cash tips, which are tips that they receive immediately (during or after their shift) in cash. This can include charged tips if you cash them out and give them to the employee as part of their cash tips. These are different from paycheck tips, which are tips that you pay out via payroll. Paycheck tips often include charged tips.
Cash tips can be a little tricky to handle because it is important that employees accurately report the cash tips they make so they can be entered in the payroll. Although the employees already have the cash in hand, they (and their employer) must pay taxes on it via payroll.
What is the FICA Tip Credit?
The FICA Tip Credit is a tax credit available to food and beverage businesses with tipped employees who serve food or drink. If you’re not sure your business qualifies, check with the IRS.
As an employer, you pay FICA taxes on your employees’ wages, including tips. With this credit, you can get some money back on the amount of FICA taxes. The IRS implemented the FICA Tip Credit to ensure that businesses are accurately reporting tips and earnings for their employees.
How to handle FICA Tip Credit
First things first, it’s essential that you and your employees report tips and all forms of compensation correctly. That is the foundation of the reporting you will need to claim the FICA Tip Credit.
If your employees made above the federal minimum wage, you may be eligible for the FICA Tip Credit. The IRS explains, “Generally, the credit equals the amount of employer social security and Medicare taxes paid or incurred by the employer on tips received by the employee.
However, employers cannot claim the credit for taxes on any tips that are used to meet the federal minimum wage rate.” To claim the tip credit, you must fill out and file IRS Form 8846 with your business tax returns. Follow the instructions on the form to make sure you qualify and fill it out correctly.
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