Restaurant owners or entrepreneurs working in the food and beverage industry can have an opportunity to save money on their taxes by filing for a FICA tip credit. Filing for this specific federal program can help restauranteurs receive different tax benefits. However, it is essential to have an in-depth understanding of how FICA tip credit works. You may wonder if you are eligible to file for this credit in California. Our California accounting professionals from Cook CPA Group invite you to keep reading as we explain who is eligible for the FICA tip credit in California.
What is the FICA Tip Tax Credit?
The FICA (Federal Insurance Contribution Act) tip credit is a benefit that employers in the food, drink, and service business can take advantage of. For instance, restaurant employers are required to report the tips patrons give their employees every year because they are considered income under FICA. However, employers can take advantage of the incentives provided by accurately reporting all their employees’ tips. This incentive is what is known as a FICA tip credit. Depending on your business, the number of employees, and tip amounts, you can potentially save thousands of dollars a year.
To take advantage of the FICA tip credits, an employer must request the appropriate forms for their tax returns with the IRS (Internal Revenue Service). This means you will be required to request and accurately complete IRS Form 8846 (Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips). For many employees, getting all this information and successfully taking advantage of the FICA tip credit can be challenging. For this reason, it is always in your best interest to hire an experienced Roseville tax accountant who can guide you and help you with this important matter.
Eligibility for FICA Tip Credit in CA
The IRS is strict regarding who can be eligible for FICA tip credits in CA and the U.S. There are two main criteria to consider when determining eligibility for this credit. First, your employees must receive tips from patrons. Typically, the IRS considers tips acquired in return for services such as delivering, providing, or serving food and beverages. Second, you must have paid employer Social Security or Medicare taxes on the tips they received.
Additionally, you must be an employer paying minimum wage to your employees and must be part of the food and beverage business community. According to FICA, the tip credits business owners can receive only apply to food and beverage business entities. Other businesses where employees receive tips won’t be able to apply for a FICA tip credit. If you need assistance with this matter, our Roseville accountants for restaurants can help you.
How Do I Calculate the FICA Tip Credit in CA?
According to the Fair Labor Standards Act (FLSA), restaurant employers are allowed to include their employee’s tips to meet their minimum wage requirements. If the sum of an employee’s tips exceeds the minimum wage, their employer can get a tax credit. To calculate the amount of credit you may get under FICA, you would need to multiply your employee’s tips in excess of their federal minimum wage by 7.65%.
Suppose you have an employee working for your restaurant at $5.00 an hour for 30 hours a week. Your employee reports $300 in tips every week. For the purposes of FICA tip credits, in this case, you must base your minimum wage based on the previously established $5.15 per hour.
The first thing that’d be best to do is take your employee’s weekly wages and multiply it by their number of working hours. You will need to multiply $5.00 by 30 hours per week, which totals $150.00. You would then need to add the reported weekly tips, which would total $450. The next step is to calculate the paid minimum wage ($5.15) and multiply it by your employee’s worked hours (30). This will give you a second value of $154.50. Next, you will subtract the first value ($450) minus the second value ($154.50) to calculate the tips in excess of your employee’s minimum wage, which is $295.50. Now, multiply $295.50 by 7.65% to determine your FICA tip.
Your FICA tip credit following this example would be $22.60. Keep in mind that this amount of money is based on one week. If you multiply this amount by 52 weeks, you would be looking at $1175.20 in FICA tip credits for a given tax year. The amount you can expect can also rise depending on the number of employees you currently have and their consistency throughout the entire year.
Why You Should Consider Filing for a FICA Tip Credit in CA
If you are a restaurant owner, you should consider filing for a FICA tip credit, especially if you are paying FICA taxes on tip income to your employees. One of the main reasons to file for this credit is to save money on your yearly tax liability. Following the last example, you may save thousands of dollars in tip credits for only one employee. However, it is essential to understand that you need to act quickly, especially if you have many employees under your command. It is always in your best interest to hire an experienced tax planning accountant for small business owners who can help you understand how this process works and can help you take advantage of the FICA tips credits.
We Can Help You Handle Your FICA Tip Credits in California
If you are in need of assistance with your FICA tip credits in California, we can help. At Cook CPA Group, we can help you with this critical process. Our Roseville and Sacramento accounting firm has decades of combined experience handling a wide range of tax-related matters. We work tirelessly and strategically to provide you with the quality accounting services your business needs. Let our knowledge, skill, and dedication help you handle your taxes while you focus on your business. To learn more about all of our Roseville small business tax accounting services, schedule your consultation by dialing (916) 432-2218.