There are currently 15.3 million employees in the restaurant industry. Employee turnover is at an all-time high of 75%. With an approximate cost of $2,000 to hire and train new staff members, it is crucial to your business’s longevity to take advantage of every tax credit available.
Beverage and Food establishments can file the Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, Form 8846. Use the form to claim a credit against the taxes paid on employee tips. The deduction is part of the general business credit on Form 3800.
Keep reading if you aren’t familiar with Form 8846 and whether your business needs to file it. We will share everything you need to know about credit for employers using this form.
IRS Form 8846
If you meet the following conditions, you should be filing credit for employer taxes you pay:
- Employees receive tips for providing, serving, or delivering food and beverage for consumption if tipping is customary
- You paid the employer portion of Medicare and social security taxes on your employee’s tips
Because there is no way for the law to collect the employer portion of FICA and Medicare taxes from the payer of those tips (the consumer), the government requires the restaurant owner to cover that portion.
When wait staff receives over $30 in tips per month, they must report the total amount to their employer. When they receive their paycheck, the employer must withhold the employee’s share of employment taxes on employee tips. The employer must also add their matching share of employment taxes on wages and tips.
The FICA tip credit allows businesses to take federal income tax deductions based on the amount of Medicare and FICA tax they pay against employee tips.
How to Calculate the Credit
To calculate your credit for employer Medicare and social security taxes, you first calculate the amount of creditable tips. The creditable tips calculation’s goal is to remove the tips making up the difference between an employee’s hourly wage and the federal minimum wage from credit eligibility.
To determine creditable tips:
- Multiply the employee hours worked by the federal minimum wage
- rate ($7.25 per hour in 2022) in the year of payment to determine the employee’s federal minimum wage amount
- Subtract the actual wages paid to the employee to determine the amount of tips not eligible for credit
- Subtract the amount of ineligible tips from the total tips reported by the employee to determine the amount of creditable tips
- Multiply the creditable tip amount by the combined Medicare and FICA tax rate to determine the amount of your credit
For 2022, the FICA and Medicare taxes total 15.3% of employee earnings. Employees and employers are each responsible for half the bill, or 7.65%. This includes a 6.2% Social Security tax and a 1.45% Medicare tax.
Qualifying Conditions for Tip Income
When determining whether funds are a tip, the payment from a customer must meet four conditions:
- An establishment cannot compel the customer to pay the tip
- The customer must be able to determine the amount without restrictions
- The tip cannot be dictated by an employer’s policy
- The customer must have the right to decide who receives the payment
If your business charges a service charge on a bill for large parties or catering events, and all servers share that money, it does not qualify as a tip. You cannot include service charges in the creditable tip calculation.
The FICA tip credit is part of the General Business Tax Credit on the employer tax return. This nonrefundable tax credit cannot reduce your tax liability below zero. You may carry any unused credit forward into future years.
The credit for employer social security taxes reduces the employer taxpayer FICA expense.
In the United States, restaurants employing ten or more daily servers must report the total amount of tips employees report to the IRS. The law deems employee tips underreported if the total tip amount is not greater than 8% of gross receipts from the company’s beverage and food sales.
If this happens, a recalculation of tip income will be necessary for at least some employees. This recalculation will impact the employer’s FICA tip credit that year.
The calculations for obtaining this credit seem easy at first, but because of the possibility of IRS flags, using a tax credit professional helps ensure all amounts you calculate are within the legal requirements.
Completing Form 8846
Form 8846 is straightforward, with a total of six lines. The trick is to make sure your employees are accurately reporting their tips. If they are not reporting tips accurately, it can hinder your ability to claim a credit or subject the business to tax penalties.
To complete the form, you need the following information:
- The total amount of tips from employees that you paid Medicare and Social Security taxes on
- The amount of tips not subject to credit provisions—enter zero if your tipped employees were paid the federal minimum wage prior to tips
- The total amount of creditable tips
- Take the amount on line 3 (creditable tips) and multiply it by 7.65%—additional steps are necessary if a wait staff earns over $128,400 in wages and tips combined
- Document other credit for employer portions of Medicare and Social Security taxes for employee tips
- Add the amount you now have to the number on line 4 to receive the total amount of your tax credit
The typical credit amount is what you pay out in employer portions of Social Security and Medicare tax on employee tips. If your business is a small food cart with minimal tips, you may receive under $100 in credit. If your business is large, it can reach the thousands.
If you pay your employees the federal minimum wage before tips, you can claim full credit. If you pay less than the federal minimum wage, you cannot claim 100% of employee tips for credit because you need to meet the minimum wage obligation using the calculations above.
Filing for Prior Years
It isn’t too late if you qualify and haven’t filed for prior years. You can file Form 8846 for up to three years following the due date of your tax return. You will need to review your records and file an amended return.
When filing amended returns, you will need to know your employee tips in that tax year, the employee wages compared to that year’s federal minimum wage, and handle appropriate calculations.
Employer tax credit professionals can handle these calculations so you receive the tax credits you deserve without making costly errors. Contact ERC Today to help calculate your Form 8846 tax credits for this and prior years.
Filing for Employee Tax Credits
If the idea of employer tax credits sounds great, but the calculations make your head spin, you aren’t alone. ERC Today can help you calculate your credits on Form 8846, plus other employer tax credits available.
Call us today at (833) 469-0939 to find out what we can do to help you receive credit against your business taxes.