FICA tip 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 wage rate of $5.15.

At the end of the year, you can use the FICA tip credits report to 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.

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.

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.

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