Tip Credit

Technical topics regarding tax preparation.
#1
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California restaurant operating as an S Corp has tipped employees. I am working with another CPA on the tax returns, and he seems to think one merely takes the total tips for the year on the W-3 and multiplies this by 7.65% to get the tip credit.

I am trying to read up and understand this credit. One thing I read said California is one of a few states who does not allow tip credits. Perhaps this is a CA FTB thing, not a federal one.

Are there any CA tax accountants who take the tip credit for their restaurant clients out there? Can you give me any guidance on this? I will keep looking into it. Thanks.
 

#2
MilesR  
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Yes it is allowed. See form 8846.

The calculation is easy in CA since CA requires all tips to be paid to employees in addition to the regular minimum wage.
Some other states allow employers to reduce wages to factor in tips for determining a minimum wage. If this "tip crediting" is used to reduce the wage while factoring in the tips, then the employer cannot get the credit for that portion of the tips.

See the instructions for form 8846 for a better explanation.
 

#3
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CA doesn’t separately allow a credit, but may allow a subtraction equal to the amount of the credit (similar
To the ERTC)


https://andersen.com/pressroom/maximizi ... ome-taxes/

http://www.michaelgraycpa.com/posts/oop ... on-credit/
 

#4
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Thanks. This helps. But I am a bit confused. If the government is reimbursing the employer for the employer's payment of Social Security and Medicare on tips, then this means the government is essentially funding the Social Security and Medicare buckets of tipped employees (where a tip credit has been taken). Sounds like a lot of money.
 

#5
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Correct, the tip credit claim by the employer can be significant
 

#6
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Kendrick wrote:Thanks. This helps. But I am a bit confused. If the government is reimbursing the employer for the employer's payment of Social Security and Medicare on tips, then this means the government is essentially funding the Social Security and Medicare buckets of tipped employees (where a tip credit has been taken). Sounds like a lot of money.


there are two tip credits:

The DOL version which says states can allow you to pay certain employees less than minimum wage. The employer receives a tip credit to make that happen. The employee must receive enough tips to get back to minimum wage or the employer foots the difference.

Then there is the income tax tip credit via 8846 which is mostly unrelated. Since the employer isn't receiving any money (it all goes to the employee), the government credits that tax back to the employer. So the government isn't really funding it so much as they are giving the employer their portion of the money back as credit (and taxing them on it by reducing their payroll tax deduction).

However, these are related in the sense that when an employer takes a tip credit to pay below minimum wage, those are ineligible wages for the income tax tip credit.

I hate that it's the same terminology.
 


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