This week’s question comes from Hillary, a restaurant manager. I know the federal minimum wage increased to $7.25 last week. How does the increase in the minimum wage affect the tip credit? Answer: Under §45B of the Internal Revenue Code of 1986 (IRC), employers are allowed a credit for the employer portion of social security taxes (sometimes known as FICA tax or OASDI or Medicare) to the extent the tips claimed plus the cash wages paid exceeds the federal minimum wage. The credit is currently 7.65% of the excess amount and is claimed on Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. Pursuant to IRC §45B(b)(1)(B), the minimum wage to be used in calculating the credit is the minimum wage in effect as of January 1, 2007 ($5.15). Therefore, the recent increase in the minimum wage does not affect the credit calculation. Vision Payroll can assist restaurants and other eligible employers in calculating the amount of tips eligible for the credit. Contact Vision Payroll if you need further information on the tip credit.
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Your answer above stops short of the full explanation as to why the employer would be issued a credit equal to the FICA rate of 7.65% by filing Form 8846. Since a total of 15.3% (combined employee and employer share) of wages up to the taxable wage based are taxed at this rate, is the credit being issued to the employer because in fact the employee is ultimately going to pay at the 15.3% when their taxes are flied in the the following year? Is this simply an attempt to begin taxing the employee for FICA purposes as if they were self-employed?
This provision is not a new provision; it was originally passed as part of the Omnibus Budget Reconciliation Act of 1993 (OBRA 93). As part of that act, the disallowed portion of meals and entertainment expense for federal income tax purposes increased from 20% to 50%. To help offset the perceived loss in revenues for food and beverage establishments, this credit was also incorporated into OBRA 93. There is no impact on tipped employees; they are not required to pay any additional tax because of this provision. Indeed, most tipped employees will not even know if their employer claimed the credit.