Have you paid excess taxes on tip income?
Restaurant owners may be entitled to recover thousands of dollars in federal taxes each year. By claiming a credit against income taxes for excess Social Security and Medicare taxes paid on employee tip income, employers can recoup hundreds per employee each year. Employers can easily determine the credits using Corporate Payroll Services FICA Tip Credit Report highlighting how much credit can be claimed per pay period and on an annual basis.
Both Employers and Employees have Reporting Requirements
Owners of restaurants are required to ensure that their non-exempt employees earn the higher of the federal or their state minimum wage. That income calculation includes hourly wages (often lower than the federal hourly minimum), cash and credit tips, plus meals provided for the benefit of the employee
Tip-earning employees are required to report their daily cash and credit tips in writing. This tip income is used in Social Security, Medicare, and income tax withholding calculations.
A tax credit of almost $750 for one employee?!?
Tip income is included as wages in meeting the minimum wage requirement. However, if tip income exceeds the federal minimum, the restaurant employer may be entitled to a credit against income taxes. To determine the available credit, the employer will multiply the excess tip amount by 7.65%, the employer portion of the FICA tax.
For example, if Jack the waiter is paid $2.35 per hour for 35 hours of work, his wages are $82.25. His reported tips of $285 increase his total reported earnings for the pay period to $367.25.
The difference between these reported earnings of $367.25 and the calculated FICA Tip Credit minimum of $5.15 for 35 hours ($180.25) is $187.00. The employer’s FICA tax overpayment on the $187.00 is $14.31. Taken over a year, the excess tax paid would be almost $750, for ONE employee!
This tax credit can be applied, dollar for dollar, against your income taxes. While it is non-refundable, it can be carried back against the prior year’s income taxes, and carried forward 20 years.
For more information about receiving or running the FICA Tip Credit Report, please email us or contact your Payroll Specialist.
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