Tips can be challenging for restaurants and bars to track and report, but your franchise may be eligible for a tax credit based on accurate reporting.
Having employees who earn tips can make it hard for businesses to keep up with the ever-changing minimum wage laws, tax implications and the other factors related to tips. It is important to have a system in place to accurately track and report tips.
Restaurant employers and select large food and beverage establishments are required to pay taxes on the tips their employees receive from customers, as these tips are considered part of employee compensation. To the surprise of many employers, there is an incentive to accurately report tips known as the FICA Tip Credit.
The FICA Tip Credit is available to restaurant and bar owners who have a tipped workforce, and all employees are paid at least the federal minimum wage. The FICA Tip Credit allows employers to apply a credit against the federal income tax for employer-paid payroll taxes on certain employee tips, resulting in potentially thousands of dollars of tax savings.
The employer-paid portion of payroll taxes consists of Social Security and Medicare, which comes out to 7.65%. The FICA Tip Credit equals the employer’s portion of the paid FICA Tax multiplied by the tips in excess of the minimum wage.
What does this mean for you?
Most restaurant owners can add up to thousands of dollars of tax savings per year. If you have questions on how you can apply for the FICA Tip Credit, contact HORNE Franchise today for a complimentary business review.