Many restaurant owners overlook a valuable tax break that could save them thousands of dollars each year: the FICA Tip Credit. If your business employs tipped staff and you’re not claiming this credit, you might be missing out on a significant opportunity to reduce your tax bill.

What is the FICA Tips Credit?

Here’s how it works. In the restaurant industry, it’s common for employees to receive tips from customers. While those tips aren’t considered income to you as the employer and can’t be deducted as a business expense, they still need to be reported on your employees’ W-2s.

Even more importantly, you’re required to pay your share of FICA taxes—Social Security and Medicare—on those reported tips. That might seem unfair at first glance, but this is where the credit comes in. The IRS offers a federal tax credit that reimburses you for the employer portion of FICA taxes paid on qualifying tips. The catch is that you must actively claim the credit in order to benefit from it.

What Tips Qualify?

Not every tip qualifies, though. The credit applies only to tips that are voluntarily given by customers in exchange for food or beverage service.

These tips must be reported by the employee and included in your payroll tax filings. In addition, you must actually pay the employer share of the FICA taxes on those tips to claim the credit. If those criteria are met, the tips generally qualify.

Why So Many Restaurant Owners Miss This

Despite how straightforward it may seem, many restaurant owners fail to take advantage of the FICA Tip Credit. In our experience reviewing restaurant tax returns, this is one of the first areas we check. When the credit isn’t being claimed, it typically comes down to one of two issues.

Sometimes, tips aren’t being accurately reported, or the employer isn’t properly calculating and remitting FICA taxes. Other times, the taxes are being paid correctly, but the credit is simply being left off the return—often because the accountant didn’t know about it or didn’t take the extra step to include it.

We’ve worked with numerous clients to amend previous years’ tax returns and recover money through this credit. In many cases, these amendments lead to immediate refunds. It’s one of the easiest and most overlooked ways to reduce tax liability in the restaurant business.

Are There Any Limitations?

There are a few limitations to keep in mind. If your tipped employees are paid less than $5.15 per hour before tips, only the portion of their tips that brings them above that threshold is eligible for the credit. This rule is designed to ensure that employers aren’t rewarded for simply using tips to meet minimum wage requirements.

Bottom Line

If you’re a restaurant owner and haven’t recently reviewed your FICA tip reporting or checked whether you’re claiming this credit, it’s worth taking a closer look. The savings can be substantial, but only if you take the time to identify and claim them.

If you’re unsure whether you qualify or need help revisiting a prior return, we’re here to help you navigate the process and ensure you’re not leaving money on the table.