Tip Credit: Getting Credit where Credit is Due

July 6, 2015|Michelle Wood

We all want to receive credit when it is rightfully due. Tax credits are no exception. Many restaurants and bars are eligible to receive – but are not using – the tip credit. This could be a significant credit for even small business owners.

Background

The Federal Insurance Contributions Act (FICA) tip credit was created to help employers recover the FICA taxes paid on employees’ tips through payroll taxes. The credit equals the amount of employer social security and Medicare tax paid on those tips. Use Form 8846 to request this credit on your business tax returns.

Your employees are required to report and pay taxes on all of their wages – which includes tips. Because these tips can be paid in cash, it is sometimes difficult to get them to report the full amount. When tipped employees don’t meet the minimum wage with their tips included, you must pay the difference.

What you need to do

It is important to train your employees about correctly reporting their tips in case of an IRS audit – especially with the use and tracking of credit cards. A tip report needs to be turned in every payroll for each employee. A point of sale (POS) system can be used to gather this information as each employee signs off at the end of their shift. Employees can also record their tips daily using Form 4070A.

You may also be required to file Form 8027 – Employer’s Annual Information Return of Tip Income and Allocated Tips – at the end of each year. This form could be a red flag indicating that employees may not be reporting 100% of their tips, because it reports total sales, charged sales, charged tips and total reported tips.

Take the necessary steps to understand your responsibilities for tip reporting, as well as for educating your employees.

Don’t navigate the FICA credit reporting alone, as there are many stipulations for which you may not be aware. The Hospitality & Retail team at Schenck can assist you with filing these forms.


Michelle Wood, EA, has more than 20 years of public accounting experience working with a wide variety of closely-held businesses, individuals and not-for-profit organizations. She provides a wide range of services including tax planning, sales tax and payroll tax compliance, and financial statement review.