Connections for Success



Are You Leaving Money on the Table?
Lisa Rudisel

How often do you see your employees leaving cash on the table?  Never, right?  No sooner have their guests left than the cash is swept up and into the abyss of their pockets.  But you as a restaurant owner are leaving money on the table if you are not claiming the FICA Tip credit.

Otherwise known as by the IRS code as the 45B Credit, this credit allows employers in the food and beverage industry to claim a credit for the social security and Medicare taxes the employer paid on tips in excess of a $5.15 minimum wage rate.  Although the credit can provide substantial tax savings, it is one that not a lot of restaurant owners take advantage of.  So, I thought since we are in the midst of the tax season, I would give you all the information necessary to take advantage of any potential tax savings this year.

First, let me show you an example of how the tip credit works:

Let’s say that a restaurant owner has 10 employees each working 30 hours a week and are paid $2.13 an hour.  Collectively, the employees reported $3,500 in tips for that week.  The Federal wage rate is $5.15 an hour for the purpose of the FICA tip credit.  In this scenario, the restaurant owner would save over $10,000 annually for these employees.

Weekly Wages = Hours Worked x Hourly Rate + Reported Tips
300 x $2.13 + $3,500 = $4,139

Wages Paid at Minimum Wage = Hours Worked x Federal Wage Rate
300 x $5.15 = $1,545

Tax Credit = Weekly Wages – Wages Paid at Minimum Wage x FICA
$4,139 – $1,545 x 7.65% = $198.44

Annual Savings per Employee = Tax Credit x Payroll Frequency
$198.44 x 52 weeks = $10,318.88 Savings Annually

That’s a pretty big tip from the IRS, if you ask me.

The business would use Form 8846 to claim the credit and will need the assistance of your accounting professional to correctly take advantage of applying the credit on your corporate and/or personal tax return.

In working with Chicago restaurants, more times than not, this is a vastly underutilized credit that a majority of business owners do not understand nor take advantage of properly.  Make sure you are speaking with your trusted accounting and payroll advisors so that they can correctly track and calculate this credit for you.

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