FICA and FLSA tip credits

The FICA tip credit is a credit an employer may apply towards 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 is 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 your FICA tip credits, which helps 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 does not 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 employer Social Security and Medicare taxes on these tips.

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

Claim the FICA tip credit

1. Sign in to Gusto.
2. Click the Reports tab.
3. Scroll down and click on the FICA tip credit link.
4. Select the year for the report and click Generate report.
5. At the top of the report, we’ve already calculated and labeled lines 1-4 that you need to fill to complete Form 8846.
   • Check the box next to Line 4 if you had any tipped employees whose wages (including tips) exceeded $160,200. 
   • Work with your CPA or tax professional to complete lines 5 and 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.

The minimum wage for tipped employees needs to comply with both your federal and state minimum cash wages. Federal’s minimum wage for tipped employees is $2.13 per hour, but many state minimums are higher than this. 

Set up FLSA tip credits

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.”
   • This will only appear after you enter the hourly wage.
8. Set the minimum wage requirement in the Hourly Minimum Wage drop-down.
   • 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.
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 the minimum wage increases or legislation changes.
• When you change an employee’s work address.
• If you've 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 earn 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.  
• When running 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.

Federal, state, and local minimum wages

The Federal minimum wage has been $7.25 since 2009, but different states and even cities may have their own minimum wage requirements.

It’s important to make sure you’re paying the correct minimum wage based on the laws in any state or city where your employees work.

• For customers with Priority support: You can use the Minimum Wage Map in the HR Resource Center.
  • Admins can upgrade the plan anytime.
• For everyone else: Check your state labor office or local government website to find the current minimum wage laws in your area.

You can also learn more about state minimum wages on our blog.

Tipped employees

If you have tipped employees and use FLSA tip credits, Gusto will notify you whenever local or state laws require a minimum wage increase.

To help you stay compliant, we'll also automatically adjust the minimum wage in the system when the new law takes effect.