FICA Tip Tax Credit – A True Benefit
by Robert Wagner, CPA

Go ahead! Try saying “tax” and “benefit” in the same sentence. Can’t do it? Well, try this one– the FICA tip tax credit is a terrific benefit for restaurant operators.

In an amazing concession to the restaurant industry, Congress enacted – then improved – a tax credit for payroll taxes paid on server tips. Operators may make a costly mistake if they don’t claim the FICA tip tax credit on the restaurant’s annual income tax return.

How much tax credit can you expect? The amount of credit varies depending upon the total server tip rate. The higher the tip rate, the higher the tax credit. Our studies show that a typical full-service restaurant can expect a tax credit of up to $10,000 for each $1 million in sales. Restaurants with higher server tip rates can expect higher tax credits.

The FICA tax credit has been available for over 10 years, but the credit was significantly enhanced in a strange bargain between the Congress and the restaurant industry. In 2007 when Congress was debating the minimum wage increase, the restaurant lobbyists were working overtime. They struck a deal with Congress. In exchange for not opposing a higher minimum wage, the restaurant industry got a new, improved FICA tax credit plus no change in the server wage of $2.13 per hour (some states have a higher server minimum wage). Until the 2007 law change, the FICA tip credit was severely limited and so wasn’t much use to operators.

FICA tip tax credit points to remember:

· Restaurant companies claim the tax credit and then typically pass the credit to their owners and investors to be used on their individual income tax returns.
· Only “creditable” tips qualify for the tax credit; i.e., server tips in excess of the old minimum wage of $5.15 per hour.
· The credit is NOT limited by the Alternative Minimum Tax.
· Any unused credit can be carried back one year or carried forward 20 years.
· Even if a restaurant company lost money in 2009, it can still claim the tax credit.
· Restaurants that have not claimed the credit in the past may amend their prior year’s tax returns to claim the credit; however, amending a return may increase the chance of an IRS audit.

No joke! The FICA tip tax credit is the most important tax benefit for restaurant operators passed by Congress in at least 20 years.

Every major payroll service can prepare a FICA tip tax credit report for their restaurant clients - but you have to ask for it! Same goes for employee leasing companies. In some cases the payroll company charges a nominal fee for the report. If your payroll service provider gives you a tip credit report, don’t automatically assume it is correct. Have your tax professional test the calculation so you have peace of mind knowing you are taking full advantage of this tremendous tax benefit. There you go. “Tax” and “benefit” in the same sentence

Robert Wagner, CPA is president of NetFinancials, Inc. which provides a full range of tax and accounting outsourced services for restaurant companies. Email: bob.wagner@netfinancials.com. www.netfinancials.com