How to Claim the 45b FICA Tax Tip Credit
Understand the process for converting employer-paid FICA taxes on employee tips into a general business credit for your food or beverage establishment.
The Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, often called the FICA tax tip credit, is a general business credit for employers in the food and beverage industry. It is designed to lessen the financial impact of the employer’s share of FICA taxes paid on tips that employees earn above a certain amount.
The credit is not a refund for all FICA taxes paid, but a calculated amount based on a specific portion of reported tip income. It directly reduces an employer’s income tax liability, providing a dollar-for-dollar offset against taxes owed.
Determining Your Eligibility
To qualify for the FICA tax tip credit, an employer must meet two conditions set by the IRS. The first is that the employer must operate a food and beverage establishment where tipping is a customary practice for providing, delivering, or serving food or beverages.
The second condition is that employees received tips that were properly reported to the employer. Employees use Form 4070, Employee’s Report of Tips to Employer, or a similar statement to disclose their cash, debit, and credit card tips. This reporting is required because the credit is calculated based on these reported amounts.
It is the employer’s responsibility to have a reliable system for tracking these reported tips to substantiate the claim for the tax credit.
Calculating the Credit Amount
The credit calculation is based only on the portion of tips that exceeds the federal minimum wage rate of $5.15 per hour, which was the rate in effect on January 1, 2007. This specific rate is used for the calculation regardless of the current federal or applicable state minimum wage.
To determine the credit, you first identify the non-creditable tips. For each employee, you must calculate the amount by which the wages you paid (excluding tips) were less than the $5.15 per hour minimum wage for all hours worked. This shortfall, which is covered by the employee’s tips, is considered non-creditable.
Creditable tips are then found by subtracting the total non-creditable tips from the total tips reported by all employees. The final credit amount is calculated by multiplying the total creditable tips by the 7.65% FICA tax rate (6.2% for Social Security and 1.45% for Medicare). This calculation must be performed before considering the wage base limit for Social Security taxes.
Claiming the Credit on Your Tax Return
The credit is formally claimed using Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. This form is where you will officially report your calculation to the IRS.
After completing Form 8846, it must be attached to your business’s annual income tax return. This includes Form 1120 for corporations, Form 1120-S for S corporations, Form 1065 for partnerships, or Schedule C (Form 1040) for sole proprietors.
The total from Form 8846 is carried to Form 3800, General Business Credit, and reported on line 4f in Part III. Form 3800 consolidates various business credits to calculate the total allowable credit for the year, which then reduces your overall income tax liability.