QuickBooks Small Business

Accounting & Payroll Issues for Restaurant Tips and Service Charges—Part 2

Employer Tax Credit on Reported Tips

Now let’s examine the employer tax credit for tipped employees, including how to calculate and file for this substantial tax credit.

The employer tax credit on reported tips was created to help offset administrative costs incurred by restaurants that comply with tip reporting requirements. When restaurants report tips as wages, additional employer payroll taxes are reported paid on Form 941. The tax credit provides an incentive for restaurants to report tips as wages and comply with the employment tax laws. This article by the U.S. Department of the Treasury goes into detail about the history of the tax credit. As of the date of this publication, the credit is still intact, despite proposals to repeal it. The employer tax credit on reported tips is something all restaurant owners and their accountants should be aware of.

There are two conditions that must be met in order to claim this credit:

  1. Employees received tips from customers for providing, delivering, or serving food or beverages for consumption where tipping is customary.
  2. Employer Social Security and Medicare taxes on those tips incurred during the tax year.

Consequently, the tax credit does not apply to service charge wages, since they are not tips, or to other industries like hair salons. Service charges are discussed above and in part one.

The tax credit is available on taxed tips, however only to the extent that tips paid are in excess of $5.15 per hour. The employer can claim a credit for the Social Security and Medicare taxes paid on those tipped wages. The credit can be used to wipe out an income tax liability, but it is not a refundable credit.

The tax credit is reported on Form 8846 Credit for Employer Social Security and Medicare Taxes Paid on Certain Tips or Form 3800 General Business Credit under certain conditions. The tax credit can be claimed within 3 years from the due date of the original return, or on an amended tax return. Consult with a tax advisor to determine if this credit would be beneficial.

Let’s look at an example. A worker earned $300 in tips and is paid for 30 hours at $3.75 per hour ($112.50), which is less than the minimum wage of $5.15 per hour. To figure the amount of tax paid that is available for the credit, first determine the amount of wages the worker would have earned if they were paid $5.15 per hour ($5.15 x 30 = $154.50). Next, determine the difference between the minimum wage and amount of wages paid ($154.50 – $112.50 = $42.00). Subtract this difference from the tips ($300 – $42 = $258). The resulting $258 is the amount of tips paid to the employee that are eligible for the tax credit. Multiply the amount eligible for the credit times 7.65%, and the restaurant will receive a $19.74 credit. This doesn’t sound like much of a credit, but let’s take a look at how the credit adds up when 20 employees, 30 employees, or 50 employees work 50 weeks per year:

Tip Credit Example

In reality, the tax credit can be substantial, especially in states where employees earn more than $5.15 per hour, because every dollar of tax paid on tips is eligible for the credit. Figuring out the tax credit can be a complex process. The payroll software or outside payroll processing provider must be able to provide the information necessary to complete Form 8846.

QuickBooks Desktop payroll has a built-in report that will provide this information for you. To access the Form 8846 worksheet from within QuickBooks Desktop, follow these steps:

1) Click on Reports > Employees & Payroll > Summarize Payroll Data in Excel as shown below.

Summarize Payroll Data in Excel

2) The report will open in Excel. If macros have been disabled, click Enable content as shown below.

Security Warning

3) Choose the desired date range, ensure that the 8846 Worksheet optional report box is checked, and click Get QuickBooks Data as shown below.

QuickBooks Payroll Reports Workbook

The employer tax credit on reported tips is not something to be passed up. One important note is that the tax credit AND the employer payroll tax expense deduction cannot both be claimed. If the tax credit is claimed, payroll tax expenses must be reduced appropriately. According to the IRS, the tax credit is a dollar for dollar reduction of the regular tax liability, where an expense deduction only reduces taxable income. Therefore, tax credits are usually more beneficial. Consult with a tax advisor to figure out if the expense deduction or the tax credit is more beneficial.

Links to the resources discussed in this series and other restaurant accounting resources are available at http://slbyrnecpa.com/restaurantaccounting.php.


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About the author

Stacey Byrne

Stacey Byrne (@SLByrneCPA) is a practicing CPA with 25 years' experience consulting with a variety of small to medium-sized businesses including restaurants, construction companies, law firms, and not-for-profit organizations. She is the co-author of Restaurant Accounting with QuickBooks, with Doug Sleeter. Stacey has worked as a staff accountant at the Iacopi, Lenz & Co. CPA firm, and is the former director of finance for a management company where she oversaw accounting and payroll for multiple facilities, including a sports/entertainment arena, theater, ice rink, and ballpark. She is a former adjunct professor of QuickBooks at San Joaquin Delta College in Stockton, California.

Stacey holds several Intuit certifications in QuickBooks (Advanced Desktop, Advanced Online, and Enterprise). She is a certified Sleeter Group QuickBooks consultant and a certified Xero Partner.

Stacey holds a B.S.B.A. degree in Accounting from California State University, Stanislaus, and is currently in pursuit of her M.S. Ed. degree in Online Teaching and Learning at California State University, East Bay. She is also a member of several professional organizations, including the California CPA Society, Sleeter Group Consultants Network, and the Woodard Network.

When she is not writing, working with clients, or studying, you will likely find Stacey at a San Francisco Giants game or enjoying family time with her two sons.

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