Jay Garcia
Jay Garcia
FICA Tip Credit: Some Financial Relief for a Strained Restaurant Industry

FICA Tip Credit: Some Financial Relief for a Strained Restaurant Industry

The past year has been an extremely trying time, to say the least. The COVID-19 pandemic has been the most harrowing public health crisis in recent memory. Not only has the crisis carried public health implications, it has also had a significant economic impact. The United States is seeing record high unemployment numbers and many businesses are struggling to stay afloat. Businesses are taking any measures possible to adapt to social changes and to continue generating revenue while limiting in-person interaction. Some industries are better suited for these adaptations than others.

One industry that has been struggling greatly is the restaurant industry. With a decrease in in-person dining, as well as many state and local ordinances limiting occupancy, many restaurants are finding it difficult to get by. Unfortunately, the current crisis has caused many restaurants to close permanently. Federal stimulus programs have been set up to aid distressed sectors such as the restaurant industry, but in most instances the assistance is not nearly enough to save these struggling small businesses.

One thing that restaurant owners need to do during these trying times is work with their tax professionals to ensure that all available tax credits in place are being utilized. Countless restaurant owners fail to take advantage of available credits every year simply because they are unaware that the credits are available. One such credit is the FICA Tip Credit.

The FICA Tip Credit is available to any employer with employees who receive tips from customers for providing food and beverages for consumption. The tips received by employees are included in employee wages, which are subject to payroll taxes, and are included in payroll tax reports. When tips are included in employee wages and payroll taxes are paid on the tips, the employer is eligible for a tax credit based on the employer portion of the payroll taxes paid.

The credit is generally equal to the amount of payroll taxes paid by the employer, but sometimes it takes a bit more to calculate. Very often, employees in the service industry that are paid tips are paid hourly rates below the federal minimum wage. An employer cannot claim the FICA Tip Credit on tips that are required to meet the federal minimum wage in effect on January 1, 2007, $5.15 an hour. All employer paid payroll taxes on tips in excess of the amount needed to reach minimum wage are considered eligible wages for calculating the credit.

This may sound a bit complex, but the seasoned tax professional at ADKF can assist in utilizing this beneficial tax credit. It is now more important than ever to use every available tax saving resource. It is imperative to stay up to date with tax measures that can benefit struggling small businesses.

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