Restaurant Payroll and Tax Credit

Authored by: Andrew Burnett.  Andrew is a staff accountant in the Salt Lake City office of Cook Martin Poulson, PC. 

Do you own a restaurant?  Do your employees receive a significant amount of tips daily? The restaurant industry is unique in many ways.  One of those ways in which the industry is different is the tracking and recording of tips received by employees.  Employees who receive tips have three primary responsibilities:

  1. Record all tips in writing
  2. Sign a statement to the employer on recorded tips
  3. Keep a record of the daily tip receipts (tip log – form 4070A)

If the employer keeps an accurate tip log (form 4070A) for each employee, then the employer could benefit from a significant tax credit at the end of their tax year.

The FICA Tip Credit is a tax credit for restaurants for FICA taxes paid on tips which exceed the minimum wage.  This credit is calculated by using the federal wage rate (currently $7.25) to find the creditable tips received by the employee. 

For example, let’s suppose a full-time employee (40 hours) makes a weekly wage rate of $2.25 ($90) and receives tips of $350 for the week (total pay = $440).  The employer than deducts the federal minimum wage rate ($7.25 * hrs worked) from the $90 to get the amount of wages not subject to the credit ($200).  The creditable tips would then equal $150 ($350 – $200). The FICA taxes are computed from the creditable tips ($150 * 7.65%). The employer would qualify for $11.48 in FICA Tip Credit per pay period from that employee.  That is $596.70 in tax credits for the year for just that one employee! This tax credit could save restaurant employers, who qualify, thousands of dollars in their yearly tax return.

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quoteCook Martin saved us over a hundred thousand dollars in taxes.quote

Paul Merrill
Fat Boy Ice Cream