What Is Form 8844: Employer Credit for FICA Taxes?

The Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, claimed on Form 8846, is a tax benefit for food and beverage businesses. It reimburses employers for the FICA taxes (Social Security and Medicare) they pay on employee tip income. This alleviates the tax burden on employers whose staff is compensated significantly through tips, as they can recover a portion of payroll taxes on earnings they don’t directly pay.

Determining Eligibility for the Credit

To qualify for this tax credit, an employer must satisfy two conditions. The first is that the business must have employees who receive tips from customers for providing, delivering, or serving food or beverages for consumption. This requirement targets restaurants, bars, and similar establishments where tipping is a customary practice.

The second condition is that the employer must have paid their share of Social Security and Medicare taxes on the tips that employees reported. The credit is calculated based on these employer-paid taxes, not the taxes withheld from the employee’s pay. The credit only applies to tips officially reported by the employee to the employer, such as through Form 4070, Employee’s Report of Tips to Employer. Unreported tips are not eligible for the credit calculation.

Information Required and Completing Form 8846

Before filing, a business owner must gather specific documentation. This includes detailed payroll records that distinguish regular wages from tip income for each employee, summaries of employee tip reports, and records of the employer portion of FICA taxes paid on those tips.

When completing Form 8846, a part of the calculation is determining the amount of creditable tips. For this credit, the calculation is based on a rate of $5.15 per hour. This prevents employers from claiming the credit on tips that are used to satisfy their minimum wage obligations.

For example, consider an employee who worked 160 hours in a month and earned $600 in wages plus $1,000 in reported tips. First, determine the wage amount for the hours worked using the $5.15 per hour rate, which is 160 hours multiplied by $5.15, equaling $824. Since the employee’s base wages of $600 are less than this $824 amount, $224 of the tips are used to bring the employee’s earnings up to the threshold. Therefore, only the remaining $776 in tips ($1,000 minus $224) are creditable for the FICA tax credit.

Claiming the Credit on Your Tax Return

The FICA tip credit is a component of the general business credit and is subject to the limitations and carryover rules that apply to that credit. The final credit amount from Form 8846 must be transferred to Form 3800, General Business Credit.

On Form 3800, the FICA tip credit is combined with any other business credits the company may be eligible to claim. This consolidated credit amount is then used to offset the business’s tax liability. Form 8846 must be filed alongside Form 3800.

Both completed forms are submitted as part of the business’s main annual income tax return. For corporations, this would be Form 1120; for partnerships, Form 1065; and for sole proprietors, Schedule C attached to Form 1040.