FICA Tip Credit: How Restaurants Claim It (and What Doesn’t Count as Tips)
Robert Wexler
The FICA Tip Credit allows eligible restaurants to recover a portion of payroll taxes paid on employee tips, but only when tips are reported correctly. The credit is based on reported tip income above minimum wage, and the most common issue that causes problems is misclassifying service charges or auto-gratuities as tips. Proper reporting and documentation are essential to claiming this credit without IRS issues.
What Is the FICA Tip Credit?
The FICA Tip Credit is a federal tax credit available to food and beverage establishments where employees receive tips. It allows restaurant owners to recover the employer portion of Social Security taxes paid on tipped wages that exceed the federal minimum wage. For many Metro Detroit restaurants, this credit can result in meaningful tax savings each year—if it is calculated and reported correctly.
Who Typically Qualifies for the Credit
Most full-service restaurants qualify, including sit-down dining establishments with tipped servers and bartenders. Quick-service or counter-only restaurants often do not qualify unless tipping is a regular and documented part of employee compensation.
Restaurants in Detroit, Troy, Warren, and surrounding areas frequently qualify but fail to claim the credit due to reporting errors or incomplete records.
What Counts as Tips (and What Does Not)
This is where many restaurants run into trouble. Tips must meet IRS requirements to qualify for the credit. Service charges and automatic gratuities are not considered tips for FICA Tip Credit purposes. Common examples include:
- Voluntary tips left by customers
- Tips distributed through a tip pool
- Tips reported by employees on Form 4070
Items that do not qualify include mandatory service charges and automatic gratuities added to large-party bills. These amounts are treated as wages, not tips, and must be handled differently for payroll and tax reporting.
How Tip Reporting Should Flow Through Your Systems
Accurate reporting starts with your POS system and continues through payroll. Restaurants should regularly review:
- POS tip reports
- Payroll summaries showing tipped wages
- Employee tip declarations
- Year-end W-2 totals
When these systems are not aligned, restaurants often underclaim the credit or expose themselves to payroll tax issues. This is especially common when POS settings are not properly configured or when service charges are incorrectly categorized.
Why Restaurants Miss the Credit (or Claim It Incorrectly)
Many restaurant owners assume the credit is automatic. It is not. Errors often occur when tips are underreported, auto-gratuities are misclassified, or payroll providers are not coordinating with tax advisors. Without review, mistakes can carry over year after year. At PLW CPA PLLC, we help Metro Detroit restaurant owners review tip reporting workflows, confirm eligibility, and calculate the credit accurately.
Learn more about how we work with restaurant owners here
How Payroll and Tax Planning Work Together
Payroll providers process data, but they do not determine tax strategy. A CPA reviews how payroll information flows into your tax return and ensures credits like the FICA Tip Credit are properly applied. Our team works with restaurants throughout Metro Detroit to align payroll records with tax filings and avoid issues during IRS reviews.
Explore more about our business tax services here
Ready for a Compliance Review?
If your restaurant has tipped employees, the FICA Tip Credit may be available—but only if everything is documented correctly.
PLW CPA PLLC helps restaurant owners in Sterling Heights, Detroit, Troy, Warren, and nearby communities confirm eligibility, fix reporting issues, and claim credits accurately.
