The Federal Insurance Contributions Act (FICA) is a U.S. federal payroll tax that helps to fund Social Security and Medicare benefits. Both employers and employees contribute to FICA taxes in a percentage based on their wages for a given pay period. However, when you’re working with tipped wages, like at restaurants, calculating FICA can get a little tricky. With tips, an employee’s pay changes each pay period, but employers are still responsible for making the right tax payments.
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Key takeaways from this article
- Understand the FICA tip credit and who is eligible
- Learn how the FICA tip credit calculation works for employers and how to file to receive it
- Stay compliant with FICA and FLSA regulations
Making these tax payments often means your business is eligible for the FICA tip credit, a federal tax credit that lets you reduce your taxable business income at the end of the year. Here, we break down the FICA tip credit and how employers can take advantage of this program.
What is the FICA tip credit?
The FICA tip credit is a federal tax credit available to businesses in the food and beverage industry. It allows these businesses to recover a portion of the Social Security and Medicare taxes (known as FICA taxes) they pay on their employees’ tips. However, this credit only applies to tips that exceed the federal minimum wage.
Employer eligibility for the FICA tip credit
The FICA tip credit is offered to employers in the food and beverage industry, where tipping is customary. Businesses are eligible for the credit if the following conditions are present:
- Employees receive tips from customers for providing, delivering, or serving food and/or beverages
- You paid or incurred employer Social Security and Medicare taxes on tips during the current tax year
You can claim the credit regardless of whether employees report tips on their tax returns. The FICA tip credit is one of the best small business tax credits available to restaurant operators.
Now that we better understand the purpose behind the FICA tip credit, let’s find out how the numbers work.
How to calculate the credit
The FICA tip credit allows your business to reduce its taxable income by the amount paid for the employer’s share of the FICA tax. Keep in mind that you may not claim the credit for taxes on any tips necessary to meet the federal minimum wage of $7.25 an hour — only on tips received after the minimum wage requirement has been met. It’s also important to note that the IRS considers distributed service charges or auto-gratuities to be non-tip wages and, therefore, excludes these amounts from the credit.
To calculate the credit, take the following actions:
- Identify tips on which you paid FICA tax: These are the tips earned by employees on which you paid the employer portion of the FICA tax. The FICA tax rate is 15.3%, with the employer and employee each contributing 7.65%.
- Calculate tips that aren’t creditable: If an employee earns less than minimum wage (currently $7.25 per hour), determine the amount of tips used to meet the minimum requirement. These tips do not quality for the tip credit.
- Determine creditable tips: Subtract tips that are not creditable from the total amount of tips. This is the amount of creditable tips.
- Figure the credit amount: Multiply the creditable tips by 7.65% — the employer portion of FICA.
Moving on, let’s find out more about how an organization can start the ball rolling on the necessary paperwork to take advantage of this credit.
How to claim FICA tip credit?
To get the FICA tax tip credit, you must complete Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, and attach the form to your tax return. You should include information about the tips your employees received and the FICA taxes your business paid on those tips.
Steps for claiming the FICA tip credit
The FICA tip tax credit is relatively easy to claim.
Application process
There is no formal application to become eligible for the FICA tip credit. As long as your business meets the eligibility requirements outlined above (basically, employees at your food and beverage business accept tips and you pay FICA taxes on those tips), you may complete Form 8846 and attach it to your tax return. Provided you’ve calculated everything correctly, you should receive the credit in the amount you paid in FICA taxes.
Filing deadlines
The employment tax filing deadlines are April 30, July 31, October 31, and January 31 of each year. To get the FICA tip credit, you need to have met all of your quarterly employment tax filing requirements and get your end-of-year tax return filed by April 15, 2025 (unless you are granted an extension).
Compliance with FICA and FLSA regulations
In addition to the FICA tip credit, most restaurants also take advantage of the Fair Labor Standards Act (FLSA) tip credit. This counts a portion of an employee’s tips toward the federal minimum wage. It’s why many restaurant workers and service industry workers may be legally paid less than the federal minimum wage. But remember, taxes paid on wages below the minimum wage are not creditable for the FICA tax credit, so you can’t double-dip on both FICA and FLSA tip credits.
Overview of FLSA requirements
Beyond providing a tax credit for business owners, the FLSA protects employees from unfair pay practices and work standards. Below are a few important FLSA requirements that all business owners should know.
- Minimum wage requirements: Unless they are in a designated, tip-supported service industry, the FLSA requires businesses to pay all employees at least the federal minimum wage.
- Overtime pay: The FLSA guarantees overtime pay for hours worked and details how employers should calculate it.
- Child labor restrictions: The FLSA restricts the age at which children can work and the type of work they can do.
- Record-keeping requirements: The FLSA requires employers to keep accurate records to remain compliant.
Food and beverage businesses should be familiar with FICA tax tip credits
The FLSA and FICA are two of the most important federal government regulations for business owners. From calculating the right FICA taxes to filing employment taxes, staying compliant with federal regulations, and filling out the proper paperwork to get tax credits, there’s a lot that restaurant owners have to think about. There are also many payroll providers for small businesses that can help you manage FICA tax tip credits, streamline paying employees, and take care of HR tasks.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.