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National Restaurant Association - A tip on tips: Remember the FICA reimbursement credit

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A tip on tips: Remember the FICA reimbursement credit

As tax season approaches, keep in mind that if you employ tipped employees, you may be eligible to claim a federal income tax credit for the FICA (Social Security and Medicare) taxes you pay on a portion of your employees' tips.

The so-called 45(B) credit, named for its place in the Internal Revenue Code, is a "general business credit" that lets restaurateurs reduce their federal income taxes by the amount of FICA taxes they pay on certain employee tips. The 45(B) credit applies to employers who operate a food or beverage establishment where tipping is customary and where food or beverages are served for either on- or off-premises consumption.

To calculate and claim the credit, businesses fill out IRS Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, and file it with their federal income tax return.

The 45(B) credit is available to all restaurateurs but with some limitations:

  • You must owe federal income taxes to claim the credit. Because you can use the 45(B) credit only to the extent your company owes federal income taxes, there may be some restaurateurs who cannot take advantage of the credit. This would include operators who break even or lose money, and thus have no taxable income. However, with some limitations even operators without federal income tax liability in a particular year may carry a portion of the credit back or forward to a year in which they owed, or will owe, federal income taxes.
  • You may not claim both a credit and deduction. Restaurateurs who take the 45(B) credit may not deduct those same FICA taxes as a business expense.
  • To claim the credit, the tips must be voluntary and paid out to the food and beverage employees.

An experienced accountant can help restaurateurs of all sizes understand how to take advantage of the credit.

Sponsored content provided by RSM, a National Restaurant Association partner. RSM provides audit, tax and consulting services to middle-market companies.

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