Everything you need to know about the FICA Tip Credit

Jun 30, 2015
Private clubs Federal tax Business tax

Regardless of whether your club is primarily golf, yacht, tennis, or all of the above; chances are you have a food and beverage operation. The FICA tip credit is available to clubs that meet certain criteria related to food and beverage employees. The credit is generated from tips received by employees for services on which the club paid or incurred employer Social Security and Medicare taxes. Depending on the size of your club's food and beverage operation, the credit could be substantial. Additionally, the credit is available for both taxable and exempt clubs; therefore all clubs could potentially use this credit to offset taxable income. This article will look at who qualifies for the credit, how the credit is calculated, and end on some uses for the credit.

Only food and beverage employees qualify for the FICA tip credit. This is defined by the IRS as "employees who receive tips from providing, delivering, or serving food or beverage for consumption if tipping of employees for such services is customary." Additionally, in order for your club to qualify for the credit, the tips must be voluntary and paid out to the food and beverage employees. There must be visible documentation stating that the tips are voluntary and at the discretion of the member. In the cases where some clubs use employee leasing arrangements, you should check with the leasing company to make sure that you qualify for the credit and it hasn't been filed on your behalf already. This information should be in the employee lease agreement.

There has been some confusion with clubs on how to properly calculate the credit. The credit is $.0765 for every dollar of qualifying tip. If your club pays the food and beverage employees an hourly wage under a certain amount, some of the tips will not qualify for the credit and will be used to bring the club up to what's called a "minimum." The minimum used for calculating this credit is $5.15 and not the state minimum such as Florida's rate of $8.05. For example, if your club is using the Florida state minimum of $8.05 and not the correct minimum of $5.15, the club could be missing out on a credit amount of $2.90 per hour, per employee which could add up quickly. The below is an example from the IRS on how to properly calculate the minimum:

An employee worked 100 hours and received $450 in tips for October 2013. The worker received $375 in wages (excluding tips) at the rate of $3.75 an hour. If the employee had been paid $5.15 an hour, the employee would have received wages, excluding tips, of $515. For credit purposes, the $450 in tips is reduced by $140 (the difference between $515 and $375), and only $310 of the employee's tips for October 2013 is taken into account.

Unfortunately, the FICA tip credit is not refundable so your club would have to have taxable income to utilize this credit. The good news is if you do not utilize the FICA tip credit in the current year, it can be carried back one year or forward 20 years. Additionally, if you are a taxable club and have a year where you utilize a substantial part of your net operating loss, post 2006 FICA tip credit can be used to offset alternative minimum tax. This has been very helpful to minimizing club's tax liability who have used a large net operating loss in a particular year for transactions like selling a large piece of land or having a large settlement that is classified as non-member income. It can also be used in exempt clubs to offset a tax liability from net rental income or non-member related income which exceeds allocable expenses.

Even if your club does not think you will have any taxable income in the near future, it is important to calculate and include this credit on the tax return so that it can carry forward into future years.  If your club currently has a mandatory service charge and does not qualify for the credit, you can change your policy and start taking the credit. Over the past few years, this credit has helped several clubs offset hundreds of thousands of dollars in tax liabilities from one time sales. If the credit does not already help offset a tax liability today, it is possible that some time in the next 20 years your club could have a taxable event which this credit could save your club hundreds of thousands of tax dollars.

RSM contributors

  • Frank Lucas

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