Tip credits

The FICA tip credit is a credit an employer may receive credit for the Social Security and Medicare taxes paid on their employees’ tip income that is not used to meet the federal hourly minimum wage rate of $5.15:

• Due to the Small Business and Work Opportunity Tax Act of 2007, the FICA tip credit will continue to be based on the old minimum wage of $5.15 an hour, even though the federal minimum wage has since been raised to $7.25 an hour.

At the end of the year, you can run a report to show you FICA tip credits, which help fill out Form 8846 and file the form along with your business’s tax returns. You can also reference this report throughout the year to estimate the credit you may be able to claim on already processed payrolls.

Note: at this time Gusto doesn't file Form 8846. This form will need to be filed outside of Gusto.

To qualify you must:

• Have had employees who received tips from customers for providing, delivering, or serving food or beverages for consumption; and
• Have paid or incurred employer Social Security and Medicare taxes on these tips.

The credit applies only to tips received by employees serving food and beverage. It is not applicable to other tipped employees.

Claiming the FICA Tip Credit

To find your FICA Tip Credit report in Gusto:

1. Go to your company profile
2. Click the Reports tab
3. Scroll down and click on the FICA tip credit tile
4. At the top of the report, we’ve already calculated and labeled for your convenience Lines 1-4 that you need to fill complete Form 8846.
   • Work with your CPA or tax professional to complete lines 5 & 6 of this form and to review the form for accuracy.

Example FICA tip credit calculation

• You pay an employee $4/hr.
• The employee receives tips equal to $6/hr; totaling a $10/hr rate for this employee.
• The employee worked a total of 10 hours during the pay period for total gross wages of $100.00.
• The employer is required to only pay FICA taxes at a $5.15/hr rate; the total of FICA taxes owed then is on gross wages of $51.50.
• The employer can receive a FICA tip credit for the difference; $100-$51.50 = $48.50 gross.
• The FICA (7.65%) tip credit you could claim equals $3.71; $48.50 x 0.0765.

The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, record keeping and child labor standards. Minimum wage is the lowest hourly rate that companies may legally pay their workers. In the United States, there are generally three types of minimum wage requirements. Minimum wage rates are mandated at the federal, state and local level. Some jurisdictions have additional requirements, such as industry-specific rules. Many states have set their own minimum wage law. In addition, some cities and counties have passed “living wage” laws, which also establish a minimum pay rate.

Note: The federal minimum wage is set at a $7.25 minimum per hour for non-exempt employees. If a state or local minimum wage is higher than the federal minimum wage, you must use the highest applicable minimum wage.

The FLSA tip credit allows the employer with hourly tipped employees to pay an employee less than the hourly minimum wage so long as the employee's regular wages combined with their tips received equal or exceed the minimum wage. If the employee does not receive enough tips to meet minimum wage, the employer must pay them the difference to raise their hourly rate to the minimum wage. Tip credits are NOT deducted from the employee's pay, however, a limited amount per hour can be claimed as a credit toward the federal or state minimum wage obligation, whichever is higher.

FLSA Tip Credit example using federal minimum wage

This number needs to comply with both your federal and state minimum cash wages. Federal is $2.13 per hour, but many state minimums are above this. For this example, we're using the minimum cash wage of $2.13 per hour.

Minimum wage - cash wage = tip credit
$7.25 - $2.13 = $5.12 tip credit

1. Click the People section and select Team members.
2. Click the employee’s name.
3. Edit the work location if the current address is incorrect.
4. Click edit next to the Compensation headline.
5. Set the Employee Type to Paid by the Hour.
6. Set the hourly wage.
7. Check the box next to “I pay this employee less than minimum wage because they receive tips.”
   • Note: This will only appear after you enter the hourly wage.
8. Set the minimum wage requirement in the Hourly Minimum Wage drop-down.
   • Note: For questions about the correct minimum wage requirement to use, consult a CPA or call the state directly.
9. Select whether the change was effective on a specific pay period or a specific date.
10. Select the pay period for which the change should be effective on payroll.
11. Add a note about the reason for the change.
    • For example: John moved to a different work location.
12. Click Save.

When you process a payroll, if minimum wage adjustments are required, you'll see "Adjusted" next to the employee’s gross pay on page one.

You may need to edit or review minimum wage requirements if:

• The size of your company changes when you add or dismiss an employee
• When minimum wage increases or legislation changes
• When you change an employee’s work address
• If you have never set it

For specific questions about the FLSA tip credit law, or minimum wage requirements, contact the Department Of Labor directly at (866) 487-9243.

Example minimum wage adjustment

• You pay an employee $3/hr.
• The employee is required to make a minimum wage of $8/hr.
• The employee worked a total of 10 hours during the pay period, totaling $30 (hourly) and received $40 in cash tips, for total gross wages of $70.00.
• The employer is required to pay the employee at the $8/hr rate; this means the employee is required to make $80.00 in gross wages for the 10 hours of work performed.  
• During payroll, Gusto will automatically adjust the gross wages to the minimum wage required, in this example $80.00.
• The employer makes up the $10.00 difference by paying the additional amount to the employee in order to meet minimum wage requirements.

If you've set up FLSA tip credits, beginning October 1, 2019, whenever local or state laws mandate a minimum wage increase, Gusto will let you know a month in advance.    

Then, to help you stay compliant, we’ll automatically adjust the minimum wage in Gusto when it takes effect. 

Federal, state, and local minimum wages
While the Federal minimum wage has been $7.25 since 2009, there are state-specific, and even local, minimum wage requirements that you may not be aware of.

It’s important that your minimum wage pay is up-to-date with minimum wage laws for any state and city where you pay employees.

• For customers with Priority support: The HR Resource Center has a Minimum Wage Map that can be used—admins can upgrade the plan at any time.
• For all other customers: Visit your state labor office or locality's website for current minimum wage laws in your state(s).