If you are an employer in the food and beverage industry, you may be entitled to a tax credit for the social security and Medicare taxes you pay on your employees' tip income. You must meet both of the following requirements to qualify for the credit:
- You had employees who received tips from customers for providing, delivering, or serving food or beverages for consumption; and
- You paid or incurred employer social security and Medicare taxes on these tips.
The credit equals the social security and Medicare taxes you paid on the tips received by the employees. However, no credit is given for tips used to meet the federal minimum wage rate of $5.15 per hour. For example, if you paid the employee $3.75 per hour and applied tips of $1.40 per hour to reach the $5.15 minimum wage, then the $1.40 per hour in tips cannot be used toward the credit. If, however, you paid each employee an amount equal to or more than the minimum wage without including tips, then you can compute the credit on all reported tips.
Since it is an income tax credit, claimed on an income tax return, you may use it to offset any regular income tax liability, but not employment tax liabilities. A credit is a dollar-for-dollar reduction of your regular tax liability, where an expense deduction only reduces your taxable income. Therefore, this credit can be more beneficial.