In my youth, the phrase that boosted profits was, “Would you like fries with that?” Today, with the swivel of a tablet, we are asking our customers, “Would you like to add a tip?”

According to Restaurant Business Magazine, consumers are now not only tipping more, but also more often and in places they were never expecting to before. Encouraging tipping at your business can be a tactic to increase employment retention and compensation, but with a larger volume of tipped employees, employers need to be up to date on all employment and reporting requirements when tips are involved.

If you have not already, be sure to read Sarah Davis’s article in the summer KT Addition to get the full scoop on “Properly Reporting Tips.”

As a CPA discussing tips, the first thing I think of is the number one most missed tax credit by food and beverage services of all sizes – the TIP credit. Depending on your payroll structure, the TIP credit calculation can be quite complicated, however it is always worth the effort.

But why is the TIP credit so important?

Employers must remit Social Security and Medicare tax on all reported tips, meaning the employer is paying 7.65% tax on all tips their employees receive. For example, if your employees reported $100,000 in tips that would generate $7,650 in additional payroll tax expense. This is a sizable expense and why the TIP credit comes in handy.

Any excess tips that are not deemed as wages are eligible for TIP credit. A common situation is that 100% of the tips would be considered eligible for the TIP credit since the base wage covered the minimum wage. In this instance, the employer would receive a tax credit for the 7.65% tax previously remitted.

The downside of the TIP credit is the credit is considered nonrefundable, meaning the credit can only reduce your income tax liability and will not be refunded. No need to worry, though. If you have a lower-profit year, any unused TIP credit will carry over to the following year to offset future income tax liabilities.

If you are not familiar with the TIP credit, be sure to reach out to your KT tax advisor!