Paying taxes is a part of owning a business. If you run a restaurant, you may have to deal with taxes that are a bit more complex than those paid by your average operation. The fact that you deal with tipped employees adds a layer of complexity to the process that’s hard to figure out, not to mention one that seems primed to cost you extra money every year. If you’re looking for a way to save on your tax bill, though, you’re in luck – the FICA tip credit can reduce your tax burden significantly.
FICA tip credit information
As you might expect, the FICA tip credit isn’t quite as simple as it seems on first glance. There are certain things you need to know about the credit in order to make sure you are able to claim it, and certain factors you may need to change about your business to make sure that claiming the credit is possible. If you can educate yourself about the credit, restaurant payroll, and what it might mean for your business, you’ll be able to understand how much this simple tax credit can help to improve your bottom line.
The FICA tip credit is a federal program that was created in order to help out restaurant owners who have tipped employees. While owners do not have to pay their employees the minimum wage as their base pay, it is the responsibility of the owner to ensure that employees make at least this much money through a combination of base pay and through tips. Employers are still expected to pay the employers’ part of the taxes on those earnings, just as they would if the tip money came through a more traditional payroll system.
This credit deals with one of the major tax problems of restaurants – unreported tips. On a basic level, at least, it makes sense for tips not to be reported. Doing so allows the employee and the employer to both avoid paying taxes. By offering this credit, though, employers are given a good reason to keep track of tips. They are also given a very good reason to ensure that their employees are being paid correctly, as failure to do so can lead to a loss of this credit and higher taxes being paid. In short, it’s a solution that does help everyone involved.
Figuring out eligibility
There is a two-part test that can determine whether or not you are eligible to get this tax credit. The first part of the test is perhaps the easiest to understand – your business must employ individuals involved with the service of food and beverages for consumption. As written, the law only applies to food and beverage employees – if you have tipped valets on your staff, for example, you will not include their wages when calculating your tip credit.
The second part of the test is a bit more difficult to deal with. The law also requires that you pay Social Security and Medicare taxes on the tips collected by your employees. This means that you must a) have a record of the tips that your employees have been paid and b) that you must have actually paid taxes on these tips in the same way you pay taxes on your employees’ other income. If your employees collect their tips ‘under the table’ or if you don’t pay taxes on those tips, you can’t collect any type of credit.
There’s quite a bit to unpack with the FICA tip credit, starting with the fact that it’s not necessarily the same kind of credit that you’d see on your own personal income taxes. It is not a refundable credit, for example, so you won’t get a refund if you somehow manage to get your tax liability down to zero. The credit does carry back and forth, though, and this should be discussed with a tax professional before you make any decisions about how you’re going to deal with your taxes.
It’s also important to note that because this credit has been created and maintained through specific federal laws, it’s not necessarily going to react to change as one might expect. The federal minimum wage might be higher than it was when the credit was originally created, for example, but you won’t be calculating your credits based on the actual federal minimum wage. Instead, you’ll be calculating your credit based on a capped amount of five dollars and fifteen cents per hour, as was decided through another federal act in 2007. This can be a complex bit of tax law, but it’s one that you need to be educated on in order to get the most from your credits.
What you need to do
If you want to ensure that your business receives this tax credit, you’ll need to ensure that you are doing your payroll correctly. This absolutely means keeping track of all the tips that your employees get, which should help you to make sure that all of your employees are making at least the minimum wage every shift. It also means that you’ll know exactly how much you’ll need to pay on taxes without having to estimate the tips that your employees have made over the course of the year. This obviously means more money paid out in taxes on your part, but it also means getting the chance to recapture a tax credit.
For the most part, this means creating a culture of tip reporting at your place of work. Employees should enter their tip total into whatever system you choose to use – even adding it to a paper ledger at the end of the night can be helpful. As an employer, it’s up to you to keep up with these numbers and to encourage your employees to report their tips accurately. While tips may feel like untaxed money, it’s important for your employees to know that they’re expected to pay taxes on their earnings.
If you have a restaurant with tipped employees, it’s vital that you pay attention to the FICA tip credit. It may not zero out your tax burden at the end of the year, but it can save you quite a bit of money. Claiming the credit may mean changing the culture of your business, but it makes economic sense to do so. If you are interested in learning more about how to handle the tax credit and answering other questions involving your employees, make sure to take a look at the PayTech new employee welcome packet.