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Increased Minimum Wage: Does It Affect Your ‘FICA tip credit?’

Posted 4:00 AM by

If your restaurant has employees who receive tips on a regular basis, you may be eligible for the “Credit for Employer Social Security and Medicare Taxes,” better known as the “FICA tip credit.” The credit is equal to the employer-paid FICA taxes above the minimum hourly wage.

However, with the recent increases to both federal and many state minimum wage rates, you may be concerned that your tax credit will decrease. The legislators behind the 2007 Small Business Act had this in mind when they drafted this legislation. In effect, the 2007 Small Business Act freezes the FICA tip credit based on the Jan. 1, 2007, minimum wage rate of $5.15. Any future increases in the minimum wage will not affect the FICA tip credit.

How the Tip Credit Works

Example: A server worked 30 hours in one week, was paid an hourly wage of $3.00 and earned (and reported) $350.00 in tips.      

Step 1: Calculate the server’s total income including tips

  • 30 hours x $3.00 per hour = $90.00
  • $90.00 + $350 tip income = $440.00 (total income)

Step 2: Calculate what the server’s income would have been at the minimum wage rate

  • 30 hours x $5.15 per hour = $154.50                                    

Step 3: Calculate the amount of income over minimum wage

  • $440.00 - $154.50 = $285.50

Step 4: Multiply the income in excess of the minimum wage by 7.65% (the employer’s portion of FICA taxes)

  • $285.50 x 7.65% = $21.84

In this example, the employer is eligible for a $21.84 tax credit. Although $21.84 is a small number, if the example is extended from 1 to 10 servers over a 52-week period, the credit jumps to $11,356.80.

Note: If the employer’s FICA taxes were deducted from income to arrive at taxable income, the amount taken as a credit will need to be added back to taxable income. The end result is that the employer is trading a tax deduction for a tax credit. Also, per the Small Business Work Opportunity Act of 2007, the minimum wage rate used to calculate this credit has been frozen at $5.15 per hour. Any tax advice or opinion herein contained is not intended to be used, and cannot be used, by anyone to avoid the imposition of any federal tax penalties.

About the Author
Jim White is a member of Katz, Sapper & Miller’s Restaurant Services Group. Jim guides restaurant owner-operators through tax compliance issues and helps them plan strategies to minimize tax liabilities and maximize savings. Connect with him on LinkedIn.

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