What is the FICA Tax Credit?

February 8, 2022

Are you an employer who owns a business where tipping is customary for providing food and beverages? You may qualify for the FICA tax credit involving the Social Security and Medicare (FICA) taxes that you pay on your employees’ tip income.

The FICA Tax Credit

The FICA tax credit applies with respect to tips that your employees receive from customers in connection with the provision of food or beverages, regardless of whether the food or beverages are for consumption on or off the premises. Despite the fact that these tips are provided by customers, they are treated as if they were paid to your employees for FICA tax purposes. Your employees are required to report their tips to you. You must withhold and remit the employee’s share of FICA taxes, and you must also pay the employer’s share of those taxes.

You claim the FICA tax credit as part of the general business credit. It’s equal to the employer’s share of FICA taxes paid on tip income in excess of what’s needed to bring your employee’s wages up to $5.15 per hour. In other words, no credit is given if the tip money only puts the employee up to the monthly rate of $5.15 per hour. If you pay each employee at least $5.15 an hour (excluding tips), you don’t have to be concerned with this calculation.

Note: A 2007 tax law froze the per-hour amount at $5.15, which was the amount of the federal minimum wage at that time. The minimum wage is now $7.25 per hour but the amount for credit computation purposes remains $5.15.

How it Works

Example: Let’s say you have a waiter at your restaurant who earns $2 per hour, plus tips. He works 160 hours for $320 a month and earns $2,000 in cash tips, which he reports to you.

The waiter’s $2-an-hour wage is $3.15 less than the $5.15 wage. As a result, he is $504 (160 times $3.15) under the $5.15 rate for the 160 hours worked. As a result, the first $504 in tip income only gets the waiter up to the minimum wage. The remaining tip money is $1,496 ($2,000 less $504). The waiter’s employer pays 7.65 percent FICA taxes on his behalf. As a result, the employer’s credit for the month is $114.44: $1,496 multiplied by 7.65%.

While the employer’s part of FICA taxes is normally deductible, the FICA taxes paid on tip income used to calculate the credit cannot be deducted because doing so would result in a double benefit. You can, however, choose not to take the credit and instead claim the deduction.

Get the Credit You’re Due

If your business pays FICA taxes on tip income paid to your employees, the FICA tax credit may be valuable to you. Other rules may apply. Contact us if you have any questions.