Credit for non-refundable tax on income may be claimed by an employer of the industry of food and beverages for the fraction of Medicare and social security taxes incurred or paid on employees' cash tips. Income of the employee is treated as the wages provided by the employer while estimating Federal Insurance Contributions Act taxes (FICA).
The credits granted are equal to the obligation of employer under FICA for the tips excluding the ones compensated for the wages to satisfy the Federal Minimum wage rate. The minimum wage rate established to calculate the credit is .15 per hour with effect from 1st January 2007.
The amount of credit that is allowed for the tips that customers pay to the employees while receiving the services like serving or delivering of the food or beverages, if it is a prevailing local custom. Restaurant operators will be taking a sigh of relief knowing that they have been given a break by the federal government.
SBWOT (Small Business Work Opportunity Tax Act) 2007 has enabled the restaurant operators to avoid the affects of new minimum wage rate by keeping the rate constant temporarily for FICA tip tax calculation.
AMT (Alternative Minimum Tax) will not be limiting the FICA tip tax credit anymore due to a significant change in Small Business Tax Act. For determining limitation on tax liability Tentative Minimum Tax is supposed and treated to be zero. Both alternative and regular minimum tax liabilities can be offset by FICA tip credit.
Both the changes mentioned above can convert into major savings in tax for the food and beverages industry. Clifton Gunderson, a respected and renowned tax specialist recommend the restaurant operators to keep FICA tip credit report updated.