If you own a restaurant, bar or other business that serves food or beverages, do not overlook the FICA tip credit. This credit provides some relief for the federal payroll taxes you pay on your employees' tip income. You are required to withhold FICA taxes (Social Security and Medicare) from your employees' wages and to make matching contributions. Generally, both employer and employee pay these taxes at a rate of 7.65% (subject to certain limitations) for a total of 15.3%.
For FICA purposes, wages include tips received by employees, even though they are paid by someone else (customers). The FICA tip credit allows you to recover some or all of the FICA taxes you pay on employees' tip income.
To calculate the credit, the first step is to determine the amount of "creditable tips." Typically, tipped employees receive an hourly rate below the full minimum wage, and if tips fail to cover the difference between the reduced wage and the full minimum wage, the employer must make up the shortfall. The credit is not available for tip income that brings an employee's wages up to the federal minimum, so that amount is excluded from total tips to arrive at creditable tips. The credit is equal to the amount of creditable tips times 7.65%.
For purposes of this calculation, the federal minimum wage is currently frozen at $5.15 per hour — its level in 2007, when the credit was first established — even though it has since increased to $7.25. So, for employers that pay...
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