Payroll Company | Cloud Payroll Pros Inc. | Highland, CA
Tips Tax Credit – If you are
an employer in the food and beverage industry, where tipping
is common, you may be entitled to a ‘Tips Tax
Credit’ of 7.65% on reported tips.
Who Qualifies? – Employers
who meet both of the following
conditions:
1.
You had employees
who received tips from customers for providing, delivering,
or serving food or beverages for consumption if tipping of
employees for delivering or serving food or beverages is
customary.
2.
During
the tax year you paid or incurred employer Social Security
and Medicare taxes on those tips.
How is the credit calculated? – Generally
the credit equals the amount of Social Security and Medicare
the employer pays on tips received by employees. If an
employer is paying less than minimum wage and using a
‘Tips Credit’ or ‘Tips Deemed Wages’
to make up the difference, then the portion of tips used to
achieve the minimum wage amount is excluded from the
‘Tips Tax Credit’ calculation. For example, and
employee worked 100 hours in a month at $3.75 per hour (where
Federal minimum wage is $5.15) earning $375 in hourly
earnings and received $500 in tips.
If
the employee had been paid the Federal minimum wage of $5.15,
they would have earned $515 in hourly wages. Therefore, for
credit purposes, the $500 in tips is reduced by $140 (the
difference between $515 and $375) and is not counted towards
calculating the Tips Tax Credit.
If
the employer pays minimum wage or greater (some states like
California do not allow you to pay less than minimum
wage and cannot use the ‘Tips Credit’ or
‘Tips Deemed Wages’), then there is no need to
adjust the tips received when calculating the credit (unless
the employees annual earnings exceed the Social Security limit
of $106,800 for 2011).
Qualified employers
wishing to claim the credit need to fill out Form 8846 Credit for Employer
Social Security and Medicare Taxes Paid on Certain Employee
Tips.
Here is a link to the
form: http://www.irs.gov/pub/irs-pdf/f8846.pdf
The credit is part of
the general business tax credit and since it is an income tax
credit, claimed on an income tax return, employers may use it
to offset any regular income tax liability, but not employment
tax liabilities. Tax credits are usually better than tax
deductions because a credit is a dollar for dollar reduction of
your regular tax liability, where an expense deduction only
reduces your taxable income.
You cannot claim both
the credit and the expense deduction. If you claim the credit,
you must reduce your Social Security and Medicare tax deduction
accordingly. Employers should evaluate annually, whether the
credit or the expense deduction is more beneficial to them.
Credits are not
refundable which means if the credit reduces your regular
income tax below zero, to a negative amount, the negative
amount is not sent to you as a tax refund. However, it is
subject to carry back and carry forward provisions of the
Internal Revenue Code, as are other components of the business
tax credit.
Credits arising in tax
years beginning after December 31, 1997 may be carried back one
year and forward 20 years. Credits arising in tax years
beginning before 1998 may be carried back three years and
forward 15 years.
If
you want more information on ‘Tips Tax Credit’
contact us at:
Cloud Payroll
7231 Boulder Ave. #526
Highland, CA 92346
Ph 909-657-6019
www.CloudPayrollPros.com