Tax Credit Tips for Social Security and Medicare (Form 8846)

The restaurant business currently employs 15.3 million people. A record-high 75% of employees are leaving their jobs each year. Utilizing every tax credit possible is essential to the longevity of your firm because it typically costs $2,000 to hire and train new employees.

Businesses that serve food and beverages may submit Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. The deduction is listed on Form 3800 as a general business credit.

If you want to learn more about Form 8846 and whether your company must file it, keep reading.

8846 IRS Form

You should be claiming credit for employer taxes you paid if you fall under the following circumstances:

  • If tipping is common, employees are compensated for supplying, serving, or delivering food and drinks for consumption.
  • On your employee’s tips, you made the employer contribution to Medicare and social security taxes.

The law mandates the restaurant owner to pay the employer’s share of FICA and Medicare taxes. All because the payer of those tips (the consumer) cannot be compelled to pay those taxes.

The total amount of tips that wait staff members get each month that exceeds $30 must be disclosed to their employer. So, the employee’s share of employment taxes on employee tips must be deducted by the employer from their paycheck. On pay and tips, the employer must also deduct their corresponding employment tax contribution.

The Medicare and FICA tax that businesses pay on employee tips can be deducted from their federal income taxes under the FICA tip credit.

Identifying Credible Tips

If you want to calculate the employee’s federal minimum wage, multiply the number of hours they worked by the applicable minimum wage (which will be $7.25 an hour in 2022).

To calculate the number of tips not eligible for credit, deduct the employee’s real wage. And to calculate the number of creditable tips, deduct the number of ineligible tips from the total tips that the employee reported.

To calculate your credit, multiply the creditable tip amount by the combined Medicare and FICA tax rates. FICA and Medicare taxes account for 15.3% of employee wages in 2022. Each party is liable for paying half the total cost, or 7.65%. This includes a 1.45% Medicare tax and a Social Security tax of 6.2%.

Filling up Form 8846

The simple Form 8846 has a total of six lines. Making sure that your employees are appropriately reporting their tips is the trick. If they are not appropriately reporting tips, it may be difficult for you to claim the credit. Or it may result in tax penalties for the company.

You require the following details to complete the form:

  • The total amount of employee tips on which you were taxed by Medicare and Social Security
  • If your tipped employees were paid the federal minimum wage before tips, enter zero for the number of tips not subject to credit provisions.

The Sum of All Creditable Tips

  • If a wait staff member makes more than $128,400 in pay and tips combined, extra steps are required. Multiply the amount on line 3 (creditable tips) by 7.65%.
  • Record any additional deductions for employer contributions to Medicare and Social Security taxes made on employee tips.
  • To determine the whole amount of your tax credit, double the amount you now have by the figure on line 4.

What you pay in employer contributions to Social Security and Medicare tax on employee tips typically qualifies as the credit amount. So, you might only get $100 in credit if your company is a tiny food cart with few tips. If your company is large, it may reach thousands of people.

You can receive the entire credit if you pay your employees the federal minimum wage before tips. Because you must fulfill the federal minimum wage requirement using the figures above, you cannot claim 100% of an employee’s tips as credit. Especially if you pay less than that amount.

Employee Tax Credit Application

Employer tax credits are a terrific idea, but if the math overwhelms you, you are not alone. In addition to other available employer tax credits, Your Part Time Accountant can assist you in figuring out your credits on Form 8846.