Credit for Employee Cash Tips

If you operate a food and beverage establishment with employees who receive cash tips from patrons, you may qualify for a credit.

This credit relates to the Social Security taxes you pay on an employee's cash tip income which is treated (for tax purposes) as paid by you to the employee. The credit applies with respect to tips received from customers in connection with the provision of food or beverages, regardless of whether the food or beverages are for consumption on or off the premises.

These tips are required to be reported to you by the employee; however, you may still take the credit even if the employee did not report the tips to you.

The credit only applies to the tip income in excess of that needed to bring your employee's wages up to $5.15 per hour, which was the minimum wage on Jan. 1, 2007. (In 2007 tax legislation that was tied to passage of the increase in the minimum wage, Congress in effect froze the FICA tax credit based on pre-2007 law so that the credit wouldn't be affected by any subsequent increase in the minimum wage.) In other words, to the extent the tip income just brings the employee up to the minimum wage level, no credit is available. Calculations are made on a monthly basis.

Example: A waiter is employed in the ABC Restaurant. He or she is paid $2 an hour plus tips. During the month, he or she works 160 hours for $320 and receives $2,000 in cash tips which he or she reports to his or her employer.

The waiter's $2 an hour rate is below the $5.15 minimum wage rate (as in effect on Jan. 1, 2007) by $3.15 an hour. Thus, for the 160 hours worked, he or she is below the minimum rate by $504 (160 × $3.15). Therefore, the first $504 of tip income just brings him or her up to the minimum rate. The rest of the tip income is $1,496 ($2,000 − $504). The waiter's employer pays Social Security taxes at the rate of 7.65% for him or her. The employer's credit is thus $114.44 for the month: $1,496 × 7.65%.

Social security taxes paid with respect to tip income used to determine the credit cannot also be deducted (but you can elect not to take the credit, in which case you can claim the deduction).

If you have any questions relating to this credit, or wish to discuss the refund opportunities mentioned above, please contact us.