For years, restaurants have benefited from one of the most valuable credits in the tax code: the FICA Tip Credit. What many business owners don’t realize is that eligibility has expanded and more businesses are now eligible!
What Is the FICA Tip Credit?
The FICA Tip Credit allows employers to claim a dollar-for-dollar federal income tax credit for the employer portion of FICA taxes paid on employee tips.
In simple terms: employees receive tips, the employer pays FICA tax on those tips, and the IRS gives the employer a tax credit for those employer FICA taxes. This is a credit, not a deduction, meaning it directly reduces taxes owed.
Who Qualifies?
Businesses in the food & beverage industry like restaurants, bars, and cafés qualify. In addition, businesses in the beauty and personal care industry, such as salons, barber shops, nail salons, and spas are now eligible! The key is that in these businesses:
- Tipping is customary
- Tips are reported as wages
- The employer pays FICA on those tips
Why This Matters
Even though a tip is income a customer is giving directly the employee (i.e. not wages paid by the business) the business still needs to pay taxes on it. This credit helps to offset that tax burden. Also, there is no cap on the credit, and it can be claimed every year. For profitable service businesses, this can translate into meaningful, recurring tax savings.
Example:
If a restaurant reports $300,000 of employee tips, the employer FICA (7.65%) on those tips is roughly $23,000. That amount then becomes available as a direct tax credit to the employer.
Bottom Line
If your business has tipped employees, the FICA Tip Credit is a must-review item. When claimed correctly, it can materially reduce your tax bill year after year.
