Taxes, including preparing, filing, and reporting, are oftentimes confusing, time-consuming tasks employers may find daunting but necessary. With a lot of moving parts, it is integral that employers thoroughly understand credits to help with tax breaks. If you don’t have your own payroll tax processing service it will benefit you to explore different types of tax credits, please see below.
Tax Tip Credits
To understand tax tip credits, employers should be aware of what is defined as a “tip,” the process by which employers determine if they owe FICA taxes on tips, and how to calculate creditable tips for the FICA tip credit.
Payment from a customer must meet the following criteria to qualify as a “tip”:
- A customer voluntarily provided the tip (i.e., they were not compelled or coerced)
- The customer determined the amount (i.e., gratuity was not automatically included in total)
- The employer may not negotiate or dictate via company policies
- The customer determines who receives the payment
To better understand why employers owe Federal Insurance Contributions Act (FICA) taxes on tips, it is important to understand the process:
- Customers provide tips to waiters, bartenders, etc.
- Employees who earn more than $20 in tips per month must report the amount of tips earned to their employer at least once a month.
- In processing payroll, employers withhold income and FICA taxes, as well as the employee’s portion of FICA taxes reported on their monthly tip income.
- Employers remit the withholdings to the government agency. They are also are required to add the same amount of the employer’s share of FICA taxes based on the total of each employee’s wages and tips.
The FICA tip credit provides relief to employers who remit FICA taxes by reducing the employer’s federal income tax based on the employer’s share of FICA taxes paid. To calculate creditable tips:
- Multiply number of hours employee worked by the federal minimum wage ($5.15).
- Subtract the actual wages the employee received (amount not eligible for credit).
- Subtract the tips not eligible from total tips employee reported (creditable tips).
- Multiply creditable tips by FICA tax rate (7.65%) to determine credit available.
FICA tip credits are included on the General Business Tax Credit and is not refundable. However, unused portions of the credit may be used in future tax returns. It is also important to note that large food or beverage businesses must report the total amount of tips employees report to the IRS. If the amount the employer submits is less than 8%, the IRS will require recalculation of tip income from the employer resulting from employee underreporting tips. Recalculation may affect future employer FICA tip credits.
Work Opportunity Tax Credits
The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers who hire individuals from specific groups who face long-standing barriers to employment (U.S. DOL). Target groups are defined as follows:
— Qualified IV-A Recipient: This includes an individual receiving assistance under part A of title IV of the Social Security Act (Temporary Assistance for Needy Families (TANF)). TANF must be received for nine-month period during 18-month period ending on the hiring date.
— Qualified Veteran: This individual can fall under any of the following circumstances (1) member of family receiving SNAP for at least six months during first 15 months of employment; (2) unemployed for at least four weeks (does not need to be consecutive) but less than six months in one-year period ending on hiring date; (3) unemployed for at least six months (does not need to be consecutive) in one-year period ending on hiring date; (4) disabled veteran entitled to service-connected disability compensation hired less than one year after discharge or release from duty in U.S. Armed Forces; or (5) disabled veteran entitled to service-connected disability who is unemployed for at least six months (does not need to be consecutive) in one-year period ending on hiring date. IRS Notice N-12-13 provides more detailed information.
— Ex-Felon: Refers to an individual hired within a year of (1) being convicted of a felony, or (2) released from prison for felony.
— Designated Community Resident (DCR): This individual must be between the age of 18 and 40, reside in (1) an empowerment zone, (2) an enterprise community, or (3) a renewal company, and resides at the location(s) after employment.
— Vocational Rehabilitation Referral: Refers to an individual with a physical or mental disability and referred to employer while receiving or upon completion of (1) a state plan approved under the Rehabilitation Act of 1973, or (2) an employment network plan under the Ticket to Work program, or (3) a program carried out under the Department of Veteran Affairs.
— Summer Youth Employee: Refers to an individual (1) between the age of 16 and 18 on date of hire or on May 1 (whichever is later), (2) only employed between May 1 and September 15, and not previously employed prior to May 1, and (3) resides in an empowerment zone, enterprise community, or renewal community.
— Supplemental Nutrition Assistance Programs (SNAP) Recipient: On the date of hire, this is an individual who is between 18 and 40 and has received SNAP benefits for the previous six months or at least three of the previous five months.
— Supplemental Security Income (SSI) Recipient: An individual who receives SSI benefits within 60 days of hiring date.
— Long-Term Family Assistance Recipient: This individual must satisfy one of the following conditions (1) received IV-A assistance for the prior 18 consecutive months, or (2) received assistance for 18 months after August 5, 1997 and has not exceeded two years since the end of the 18-month period, or (3) ineligible for assistance due to federal or state law limitations and has not exceeded two years since cessation.
— Qualified Long-Term Unemployment Recipient: This individual is defined as unemployed for at least 27 consecutive weeks at time of hire and received unemployment compensation during unemployed period.
Employers must receive certification of a targeted group member before they may claim the WOTC. Eligible employers must file Form 8850 with their respective state agency within 28 days after the eligible worker begins employment.
Taxable businesses may apply the WOTC to business income tax liability, where carry-back and carry-forward rules are applicable. For more details, carefully review the instructions for Form 3800. For tax-exempt employers, the credit is limited to employer social security tax owed on wages and will claim the credit using Form 5884-C. The WOTC will not impact the employer’s Social Security tax liability documented on the employment tax return.
Taxes oftentimes are complex business matters that require close attention to detail. Errors, incomplete or missing forms and information, and late filings can lead to delays, penalties, and fees that can be quite costly to employers.
Partner with QBS, your trusted PEO provider, who specializes in tax reporting can offer customized reporting, claims management, and other tax-related matters to ensure timely, accurate records and files are submitted to the appropriate government agencies.