What Is IRS Form 8844 for the FICA Tip Credit?

While business owners may search for information on IRS Form 8844 for tip credits, the correct form is Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. Form 8844 is a separate form used for claiming the Empowerment Zone Employment Credit.

Form 8846 allows eligible employers, primarily in the food and beverage industry, to receive a general business credit for the FICA taxes they paid on their employees’ reported tip income. This credit is a dollar-for-dollar reduction of income tax liability. It is designed to alleviate the financial burden on employers who must pay their share of payroll taxes on compensation that comes from customers, not directly from the business’s own funds.

Determining Eligibility for the Credit

To qualify for the credit, an employer’s business must have employees who receive tips from customers for providing, delivering, or serving food or beverages. The credit is targeted toward establishments like restaurants and bars where tipping is customary.

Another condition is that the employer must have paid their share of FICA taxes on the tips that employees reported. The credit is based on these employer-paid taxes of 7.65% and not the taxes withheld from the employee’s pay. Tips must be officially reported by the employee to the employer, for example, on Form 4070, Employee’s Report of Tips to Employer.

The credit calculation has a limitation tied to the federal minimum wage. The credit is only available for FICA taxes paid on tips above a base amount, which is determined using a minimum wage rate of $5.15 per hour, the rate on January 1, 2007. If an employee’s direct cash wage is less than $5.15 per hour, a portion of their tips is used to make up the difference and is not eligible for the credit.

For example, an employee who works 100 hours and is paid a cash wage of $3.00 per hour has a total cash wage of $300. The minimum wage threshold for that period is $515 (100 hours x $5.15). The first $215 of that employee’s reported tips are considered part of their base pay for this calculation and are not creditable. Only tips reported above that $215 can be used to figure the credit.

Information Required to Complete Form 8846

Before completing Form 8846, an employer must gather precise financial records. The primary information needed is the total amount of tips reported by all employees during the tax year, which should be available from standard employee tip reports.

Employers will also need detailed payroll records that separate regular wages from tip income. These records must show the hourly wage rate and the number of hours worked for each tipped employee to correctly apply the minimum wage test described previously.

Documentation of the employer’s share of FICA taxes paid on the reported tips is also required. This information can be found on the employer’s quarterly payroll tax returns, such as Form 941, Employer’s QUARTERLY Federal Tax Return. These forms summarize total wages, tips, and the FICA taxes paid by the employer.

Calculating and Claiming the Credit

Once the non-creditable tips are subtracted from the total reported tips, the result is the “creditable tips.” This final tip amount is then multiplied by the FICA tax rate of 7.65% to determine the total credit amount. For instance, if an employer determines they have $50,000 in creditable tips for the year, their credit would be $3,825 ($50,000 x 0.0765).

The FICA tip credit is a component of the General Business Credit and must be reported on Form 3800, General Business Credit. The total from Form 8846 is carried over to Form 3800, where it is consolidated with any other business credits the employer may be eligible for.

The total General Business Credit from Form 3800 is then applied against the employer’s income tax liability on their main annual tax return. For a corporation, this would be Form 1120; for a partnership, Form 1065; and for a sole proprietor, Schedule C of Form 1040. The credit directly reduces the amount of income tax the business owes for the year.