Throughout the hospitality industry, tipping is not only used to acknowledge a patron’s customer service experience but also as a method for employees to garner wages from their employer. Employers are then responsible for paying Federal Insurance Contributions Act (FICA) and Medicare taxes on the tips employees receive. Restaurateurs can alleviate some of this tax liability by claiming the FICA tip credit, which is a credit against their federal income tax based on the share of FICA and Medicare taxes they pay on tip income employees report.  

Our restaurant tax pros highlight more about the FICA tax credit below, including which businesses qualify and how it is calculated.  

About the FICA Tip Credit 

The FICA tip credit is a tax credit available to businesses within the hospitality industry, such as restaurants, bars and hotels, that employ individuals who receive tips. The credit allows employers to claim a portion of the Social Security and Medicare taxes (FICA taxes) paid on behalf of their tipped employees as a credit against their federal tax liabilities.  

The credit is non-refundable and is subject to the carryback and carryforward provisions for general business tax credits. Additionally, it is available regardless of whether the employee reports tips on their own tax return on which the employer FICA taxes are paid. Employers cannot deduct from taxable income the amount of FICA taxes taken into account in determining the credit and may elect not to have the credit applied for a taxable year. 

How to Calculate the FICA Tip Credit  

Generally, the credit equals the full amount of Social Security and Medicare taxes paid by the employers on tip income in excess of the federal minimum wage in effect when the credit was enacted ($5.15 an hour). If an employee’s non-tip wages are less than $5.15 an hour, the credit equals the employer’s share of FICA taxes paid on the employee’s hourly tip wages after reducing that tip wage by the difference between the employee’s non-tip hour wage and $5.15. 

For example, an employee worked 100 hours and received $450 in tips, plus $375 in non-tip wages ($3.75 an hour). If the employee was paid $5.15 an hour, they would have received $515 in non-tip wages. For credit purposes, the $450 in tips is reduced by $140 (the difference between $515 and $375), and only $310 of the employee’s tips for that month is applicable for the credit.  

Take Tips from Us

Keep in mind, the credit is only available with respect to FICA taxes paid on tips received from customers in connection with providing, delivering or serving food or beverages for consumption.  

To obtain assistance with calculating and maximizing the FICA tip credit for your qualified employees’ wages, count on our business tax advisors who specialize in the restaurant industry to help guide you. Our dedicated restaurant pros are here to also help you identify additional tax-savings solutions relevant to your business to optimize your current tax situation.