Federal Tip Credit: An overlooked tax benefit for restaurant owners

Your Guide to State, Local, Federal, Estate + International Taxation

A common topic of discussion, and sometimes heated debate, is that many restaurant patrons do not see eye to eye on the cultural practice of tipping. When to tip? How much? Should you tip on drinks? Do you tip based on the pre-tax or after-tax bill? There are as many questions as there are differing opinions. To quote the 1992 film Reservoir Dogs:

I don’t tip because society says I have to. I’ll tip if someone really deserves it. But this tipping automatically, it’s for the birds.

Unfortunately, I can’t settle the great tipping discussion today, but I can inform restaurant owners about a tax benefit that they should be taking advantage of: the Federal Tip Credit. Filed with the annual tax return on Form 8846, the tip credit is a dollar-for-dollar reduction of tax liability for Social Security and Medicare taxes paid by the employer on tips received by employees. To qualify for the credit, restaurants must meet the following criteria:

  1. Have employees who received tips from customers for providing, delivering or serving food or beverages for consumption
  2. Paid or incurred employer Social Security and Medicare taxes on these tips

Learn more about the major issues impacting restaurant owners today

The credit is available only on tips received by food and beverage employees, and not on any other tipped employees. For example, the credit cannot be applied to tips received by valet workers, or any other non-food and beverage employee.

The credit is calculated based on reported tips over and above the minimum wage earned by employees. For purposes of the tip credit, the minimum wage can vary depending on the state and municipality the restaurant operates in. Due to the potential complexities of the calculation, we recommend you consult your Henry+Horne tax advisor for assistance with filing the credit.

Thanks for reading, and remember, tip your servers!

Austin Bradley, CPA