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:
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